Executive Summary
As a part of our study Curriculum it is necessary to conduct a research project. It provides to opportunity to understand the particular topic inside out and which leads to through to that topic. The title of the project is Fundamental analysis of FMCG sector. This project is to gain knowledge about FMCG sector and its segments. This project focuses on make to the good portfolio or suggests the sound portfolio regarding
the FMCG sector by selecting good company from tool of ratio analysis. This project has been taken into consideration to guide investor to earn the maximum profit by reducing the risk in future of sound company industry. This report covers FMCG sector its segments, scope and its future prospect. The report concentrate on Godrej consumer Product Company, a major player in FMCG sector and accordingly the data is collected and analyzed. Tool used to analyses data is ratio analysis which gives the clear picture about company and dividend discount model to come to the target price of GCPL and accordingly conclusion and recommendation are given. analyzing the recent trends fundamental analysis in particular
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INTRODUCTION TO FUNDAMENTAL ANALYSIS (Chapter-1)
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What is analysis?
The examination and evaluation of the relevant information to select the best course of action from among various alternatives. The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movement in the market.
What is technical analysis?
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
What is fundamental analysis?
Fundamental Analysis involves examining the economic, financial and other qualitative and quantitative factors related to a security in order to determine its intrinsic value. It attempts to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Fundamental analysis, which is also known as quantitative analysis, involves delving into a company?s financial statements (such as profit and loss account and balance sheet) in order to study various financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts, brokers and savvy investors.
Many analysts and investors focus on a single number--net income (or earnings)--to evaluate performance. When investors attempt to forecast the market value of a firm, they frequently rely
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on earnings. Many institutional investors, analysts and regulators believe earnings are not as relevant as they once were. Due to nonrecurring events, disparities in measuring risk and management's ability to disguise fundamental earnings problems, other measures beyond net income can assist in predicting future firm earnings.
Two Approaches of fundamental analysis
While carrying out fundamental analysis, investors can use either of the following approaches: 1 .Top-down approach: In this approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector. 2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses, irrespective of their industry/region.
How does fundamental analysis works?
Fundamental analysis is carried out with the aim of predicting the future performance of a company. It is based on the theory that the market price of a security tends to move towards its 'real value' or 'intrinsic value.' Thus, the intrinsic value of a security being higher than the security?s market value represents a time to buy. If the value of the security is lower than its market price, investors should sell it.
The steps involved in fundamental analysis are:
1. Macroeconomic analysis, which involves considering currencies, commodities and indices. 2. Industry sector analysis, which involves the analysis of companies that are a part of the sector. 3. Situational analysis of a company. 4. Financial analysis of the company. 5. Valuation
The valuation of any security is done through the discounted cash flow (DCF) model, which takes into consideration:
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1. Dividends received by investors 2. Earnings or cash flows of a company 3. Debt, which is calculated by using the debt to equity ratio and the current ratio (current assets/current liabilities) Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. A good financial analyst will build in financial ratio calculations extensively in a financial modeling exercise to enable robust analysis. Financial ratios allow a financial analyst to: ? Standardize information from financial statements across multiple financial years to allow comparison of a firm?s performance over time in a financial model. ? Standardize information from financial statements from different companies to allow apples to apples comparison between firms of differing size in a financial model. ? Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial model.
In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are: ? Performance ratios ? Working capital ratios ? Liquidity ratios ? Solvency ratios
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WHY ONLY FUNDAMENTAL ANALYSIS Long-term Trends
Fundamental analysis is good for long-term investments based on long-term trends, very long-term. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies.
Value Spotting
Sound fundamental analysis will help identify companies that represent a good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.
Business insights
One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such pains taking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. A stock's price is heavily influenced by its industry group. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or incomeoriented (high yield).
Knowing Who's Who
Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. This has happened with many of the pure internet retailers, which were not really internet companies, but plain retailers. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations. The charts of the technical analyst may
give all kinds of profit alerts, signals and alarms, but there’s little in the charts that tell us why a group of people make the choices that create the price pattern
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Literature Review
Sugandharaj Kulakarani (2011) examined the application of fundamental analysis with reference to ONGC. The changes in the share value depends not only how company is performing but also the industry and economic factors inspire the value of the stock and that will be reflected in the share price. The fundamental analysis influence the fluctuation of price in the market and use of fundamental analysis help investors to find the intrinsic value of stocks that they wishes to buy. Dyna Seng Jason. R Hancock (2012) examined the importance of each phases of fundamental analysis in their study fundamental analysis and the prediction of earnings. The study suggested that the economy and industry related factors have slight influence on earnings and it concluded that financial statements are more useful to predict the earnings and returns. Venkatesh C.K. and Madhu Tyagi (2011) based on the survey examined the application of fundamental analysis and technical analysis among stock brokers and fund managers in Indian stock market. The study observed significance of each technique used to predict the market behavior by the experts in the market and concluded that both the techniques are complimentary to each other. Venkatesh C.K., Madhu Tyagi and Ganesh (2012) present the importance of fundamental analysis and technical analysis among brokers, fund managers and portfolio managers in the Indian stock market to foresee the share price movement. The outcome of the study shows that among EIC factors economy and company factors play a major role in forming the forecast and respondents rely on both the techniques to pretend the market movement
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OBJECTIVES OF THE PROJECT:
1. To gain in depth knowledge about FMCG sector 2. To find the intrinsic value of particulars FMCG Company or its Growth prospective. 3. To Understand the factor that affect the Movement of the Script 4. To carry out an economic analysis and industry analysis that provides cues to investors. 5. To analyses the financial health of the selected FMCG stocks. 6. To analyze the FMCG industry to see the revenue growth driver in near Future.
SCOPE AND RELEVANCE OF THE PROJECT:
1. This study serves to answer questions, such as: a. Is the company’s revenue growing? b. Is it actually making a profit? c. Is it in a strong-enough position to beat out its competitors in the future? d. Is it able to repay its debts?
2. Study can be used for investor to make investment decision in Equity Investment. 3. Study can also use by Broking Firm for assisting Investors regarding Equity Investment.
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Research Methodology
Problem Statement: Fundamental analysis with ref. to FMCG Sector Assumption and benefit of study Assumption: The assumption of this study is that’s the majority of information that goes into the analysis comes from the company itself. Company employee investor relation manager especially to handle the analyst community and release information. When reading these reports, it is important to take into consideration any biases a sell side analyst may have. The buy side analyst, on other hand is analyzing the company purely from an investment standpoint for portfolio manager. Benefits: Fundamental analysis helps in: Identifying the intrinsic value of security Identify the long term opportunities, since it involve real time data. RESEARCH DESIGN This research was descriptive and conclusion oriented research. •Conclusion Oriented Research: -Research designed to assist the decision maker in the situation. In other words it is a research when we give our own views about the research. •Descriptive Research: A type of conclusive research, which has as its major objective the description of somethingusually market characteristics or functions. In other words descriptive research is a research where in researcher has no control over variable. I have tried to describe the situation of GCPL company whether they are fundamentally strong are not. Research tool used 9|Page
•Tables: This tool was used to present the data in tabular form. •Bar Graphs and Pie Charts: These tools were used for analysis of data Data collection: Data collection here is secondary data for research and the data is being collected from company’s annual report, press release, transcript and use of various search engines
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ECONOMIC ANALYSIS (Chapter- 2)
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INDIAN ECONOMY
The economy of India is the tenth-largest in the world by nominal GDP and the third largest by purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRICS. On a per capita income basis, India ranked 140th by nominal GDP and 129th by GDP (PPP) in 2011, according to the IMF. India is the nineteenth largest exporter and tenth largest importer in the world. Economic growth rate stood at around 6.5% for the 2011–12 fiscal year.
Trade WTO, SAFTA, G-20 and others Fiscal year 1 April – 31 March Rank 10th (nominal) / 3rd (PPP)
Economy of Republic of India
Currency
1 Indian Rupee (INR) ( ) = 100 Paise
The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist policies and importsubstituting economy that failed to take advantage of the post-war to expansion of trade. This model and contributed widespread inefficiencies
organizations
Statistics
GDP
$1.946 trillion (nominal: 10th; 2012) $4.710 trillion (PPP: 3rd; 2012)
GDP growth GDP per capita
5.3% (Q2, 2012) $1,514 (nominal: 139th; 2011) $3,703 (PPP: 125th; 2011]
corruption, and the failings of this system were due largely to its poor implementation. In 1991, India adopted liberal and free-market oriented principles and liberalized its economy to international trade under the guidance of Manmohan Singh, who then was the Finance Minister of India under the leadership of P.V. Narasimha Rao the then Prime Minister who eliminated License Raj a pre- and post-British Era mechanism of strict government control on setting up new industry. Following these strong economic reforms, and a strong focus on developing national infrastructure such as the Golden
GDP by sector
agriculture: 17.2%, industry: 26.4%, services: 56.4% (2011 est.)
Inflation (CPI)
CPI: 10.56%, WPI: 7.18% (Dec 2012)
Labour force 487.6 million (2011 est.) Labour force by occupation Unemployment Average gross salary agriculture: 52%, industry: 14%, services: 34% (2009 est.) 9.4% (2011 est) $1,410 yearly (2011)
Quadrilateral project by Atal Bihari Vajpayee, the then Prime Minister, the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people
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Overview
The economy was then characterised by extensive regulation, protectionism, public ownership of large monopolies, pervasive corruption and slow growth. Since 1991, continuing economic liberalisation has moved the country towards a market-based economy.By 2008, India had established itself as one of the world's fastest growing economies. Growth significantly slowed to 6.8% in 2008–09, but subsequently recovered to 7.4% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period India’s current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2010–11, according to the state Labour Bureau, was 9.8% nationwide. As of 2011, India's public debt stood at 68.05% of GDP which is highest among the emerging economies. However, inflation remains stubbornly high with 7.55% in August 2012, the highest among its BRICS counterpart India's large service industry accounts for 57.2% of the country's GDP while the industrial and agricultural sectors contribute 28.6% and 14.6% respectively. Agriculture is the predominant occupation in Rural India, accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector around 14%. However, statistics from a 2009–10 government survey, which used a smaller sample size than earlier surveys, suggested that the share of agriculture in employment had dropped to 45.5%. Major industries include telecommunications, information technology, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software and pharmaceuticals.The labour force totals 500 million workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish.In 2011–2012, India's top five trading partners are China, United Arab Emirates, United States, Saudi Arabia and Switzerland. India's total trade in goods and services has reached a share of 43% of GDP in 2005–06, up from 16% in 1990–91. In the year 2010–11 India's total merchandise trade (counting exports and imports) stands at $ 606.7 billion and is currently the 9th largest in the world. During 2011–12, India's foreign trade grew by an impressive 30.6% to reach $ 792.3 billion (Exports-38.33% & Imports-61.67%)
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Post-liberalisation period (since 1991)
In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies By the turn of the 20th century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than agricultural residents. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century
GDP of India has risen rapidly since 1991
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Sectors
Industry and services Industry accounts for 28% of the GDP and employ 14% of the total workforce. India is 11th in the world in terms of nominal factory output according data is compiled through CIA World Factbook figures. The Indian industrial sector underwent significant changes as a result of the economic liberalisation in India economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to privatisation of certain public sector industries, liberalised the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods.Post-liberalisation, the Indian private sector was faced with increasing domestic as well as foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, and relying on cheap labour and new technology. However, this has also reduced employment generation even by smaller manufacturers who earlier relied on relatively labour-intensive processes.[ Retail Retail industry is one of the pillars of Indian economy and accounts for 14–15% of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail market in the world, with 1.2 billion people. India's retailing industry essentially consists of the local mom and pop store, owner manned general stores, convenience stores, hand cart and pavement vendors, etc. Organised retail supermarkets account for 4% of the market as of 2008. Regulations prevent most foreign investment in retailing. In 2012 government permitted 51 %FDI in multi brand retail and 100% FDI in single brand retail. Moreover, over thirty regulations such as "signboard licences" and "anti-hoarding measures" may have to be complied before a store can open doors. There are taxes for moving goods from state to state, and even within states Agriculture India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 15.7% of the GDP in 2009–10, employed 52.1% of the total workforce, and despite a steady decline of its share in the GDP, is still the largest
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economic sector and a significant piece of the overall socio-economic development of India. Crop yield per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India. However, international comparisons reveal the average yield in India is generally 30% to 50% of the highest average yield in the world. Indian states Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Bihar, West
Bengal, Gujarat and Maharashtra are key agricultural contributing states of India.
Foreign direct investment
As the third-largest economy in the world in PPP terms, India is a preferred destination for FDI; During the year 2011, FDI inflow into India stood at $ 36.5 billion, 51.1% higher than 2010 figure of $ 24.15 billion. India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies were a significant hindrance. However, due to positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia-Pacific region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market
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Economic trends and issues In the revised 2007 figures, based on increased and sustaining growth, more inflows into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020, India’s GDP per capita in US$ terms will quadruple", and that the Indian economy will surpass the United States (in US$) by 2043. In spite of the high growth rate, the report stated that India would continue to remain a low-income country for decades to come but could be a "motor for the world economy" if it fulfills its growth potential. According to the official estimates, Indian economy is expected to grow at 7.6% (+/- 0.25%) in the fiscal year 2012–2013. However, leading financial organisations and economic thinktanks expect Indian economy to grow slower than official projections. Indian economic growth outlook April, 2012 – March, 2013 Organisation International Monetary Fund World Bank Asian Development Bank Nomura Morgan Stanley JP Morgan Goldman Sachs Bank of America- Merrill Lynch HSBC[193]
Standard Chartered[194] Centre for Monitoring Indian Economy [195]
Estimated GDP growth rate 6.1% 6.9% 6.5% 5.8% 5.8% 6-6.5% 6.6% 6.5% 6.2%
6.2% 7.2%
Month of projection July 2012 June 2012 July 2012 June 2012 June 2012 June 2012 May 2012 May 2012 June 2012
June 2012 July 2012
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Industry Analysis (Chapter-3)
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INDIAN FMCG INDUSTRY OVERVIEW
? Fast Moving Consumer Goods (FMCG) goods, popularly named as consumer packaged goods, play a vital role as a necessity and as an inelastic product ? The Indian FMCG sector is the fourth largest sector the economy with a total market size of Rs. 167,100crs. The market is estimated to grow to US$ 100 billion by 2025, according to market research firm Nielsen. ? In the last decade the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated to 17%. ? The FMCG Industry is characterized by a well-established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments ? FMCGs are slowly and gradually positioning and deeply penetrating in the fast growing rural market. The Rural mindset is open to consumption of newer, more contemporary food categories and as a result, drives consistent growth ? Rural India accounts for more than 700 Million consumers or 70% of the Indian population and accounts for 40% of the total FMCG market ? The Rural market is a large market space with very low organized player penetration. Across the globe, the Indian rural market is probably the single largest “unit” of opportunity ? Also with changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $80 billion by 2026 in towns with population of up to 10 lakh ? The sector has a tremendous opportunity for growth in India, with the growing population, the rising incomes, education and urbanization, the advent of modern retail, and a consumption-driven society
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INDUSTRY CHALLENGES
Price of inputs
•Commodity prices fluctuate, which make it difficult to finalize raw material prices, affecting the final price of the product • Indian consumers are very price-sensitive and value conscious, making it difficult for FMCG firms to pass on the increased cost
Emergence of
Private Labels
•Private labels serve to lower the consumer’s price points, particularly at the mass level •Conflicts of interest when a retail chain has its own label whose packaging looks like category leaders’ and stocks brands of other manufacturers, (in terms of display space, promotions etc
Counterfeit and Pass-offs
•These products narrow the scope of FMCG products in rural and semi-urban market •The spurious pass off products affect large, high quality brands which have actually invested money in research and development to create their products and build brand equity
Infrastructur
•Power Costs •Transportation Infrastructure •Agricultural Infrastructur
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INDUSTRY TRENDS
Consolidation
•Indian FMCG Companies Are Consolidating Their Existing Business Portfolios
Product Innovation
•Several companies have started innovating by launching or customizing their existing product portfolios for new consumer segments •Lifestyle And Premium Range Products Are The Current Hot Targetproduct Segments Among Indian FMCG Players
Lifestyle Products
Expanding Horizons
•A number of companies are exploring the business potential of overseas markets and several regional markets
Backward Integration
•Backward integration is becoming the preferred strategy for increasing profit margins
Expanding Distribution Network
•Companies are now focused on improving their distribution networks to expand their reach in rural India
Third Party Manufacturing
•FMCG players often outsource manufacturing or processing of a certain range of products to small vendors
Focus On Enhancing Presence In Africa
•FMCG companies entering Africa as it helps to be close to consumption markets within Africa. Such foreign investments are encouraged by local governments, as they offer incentives to enter the markets
Key Trends
? Consolidation o o Indian FMCG companies are either their focus on certain market segments are consolidating their existing business portfolios. Ex: Dabur India Ltd merged with its wholly owned subsidiary, Dabur Foods Ltd, with itself.
? Product Innovation
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o o o
Several companies have taken to innovation by launching or customizing their existing product portfolios for new consumer segments. Ex: Emami Ltd launched a men’s fairness cream, Nestle India and GCMMF (Amul) have launched pro-biotic products by providing active ingredients in regular consumable products such as curd/yoghurt and ice cream
? Lifestyle ? ? ? Lifestyle and premium range products are the next target product segment among Indian FMCG Players. Ex: P&G launched its Olay range. The company also has plans to expand its existing Indian product portfolio categories from 8 to 25. HUL: The Company launched Avinace, an exquisite range of high-technology, high performance beauty services for women. ? Third Party Manufacturing o FMCG players now often outsource the manufacturing or processing of a certain range of products to small vendors. This approach will help companies focus on front end marketing more effectively. o Ex: GlaxoSmithKline Consumer Healthcare Ltd. Outsource the processing of products such as malt – based foods, biscuits and nutrition bar sweetmeats to third-party vendors. o HUL outsources the processing of its products such as soaps, synthetics detergents, and packaged tea to third party vendors. ? Expanding Horizons o o Several Indian companies are exploring the business potential of overseas markets and several regional markets. Ex: In 2008, Tata Tea acquired a minority stake in US vitamin water bottler, the Rising Beverage Company, which owns Activate brand. ? Backward Integration o Backward Integration is becoming the preferred strategy for increasing profit margins.
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? Expanding distribution networks ? ? ? Companies are now focused on improving their distribution networks to expand their rural reach in rural in rural India Ex: HUL announced its plans to triple its rural distribution reach by 2012 in its quest to generate higher sales volumes. Dabur India is focusing on improving its rural footprint and introducing special packs for consumer in these areas ? Rising Importance of smaller–sized packs ? Companies are increasingly introducing smaller stock keeping units (SKUs) at reduced price points. This helps them sustain their margins, maintain volumes from price conscious customers, expand their consumer base and help them address the needs of customers who cannot afford larger and higher priced SKUs. ? ? Ex: GCPL has launched smaller soap SKUs for Cinthol Original & Deo. About 40% of Emami overall sales come from SKUs priced at Rs less than 10, Navratna oil is available in sachets of Rs 1, Boroplus antiseptic and Fair and handsome are sold at Rs 5. To meet the one at a time customer need, Emami launched Rs 2 SKU of Zandu Balm. ? Focus on Increasing Presence in Africa: o The proximity to consumption markets within Africa as well as continents such as Europe and the openness of governments there to foreign investment is the driving force behind the increasing presence of Indian FMCG companies in Africa. o Ex: GCPL acquired Rapidol and Kinky in South Africa in 2006 and April 2008, Tura in Nigeria in April 2010 and Darling group in June 2011.
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GROWTH DRIVER
Large Market
Spending Pattern
Rise of Rural Consumer
Growt h Driver
Increasing per capita income of urban population Implement tion' GST
FDI support
? Infrastructure Development o o Improved Infrastructure facilities are expected to support the enhanced supply chain management The government of India has increased its spend on infrastructure, including the construction of roads ? Significant Increase in Consumption Level o o By 2025, India is poised to become the world’s fifth largest consuming country from the twelfth position in 2010 This will ensure the continuous growth of the FMCG industry in the future.
? Disposable Income o o According to industry estimates, household income in the top 20 boom cities is projected to grow at 10 percent annually by 2018 Further, the top 100 cities in India contribute between 50-60 percent of the overall consumption spends 24 | P a g e
? Retail Business o Real estate development in the country, such as the construction of shopping malls and hypermarkets, are up new business channels for FMCG companies ? Urbanisation o Indian cities are expected to add 379 mn people to the consumer base for FMCG companies, as the urbanisation rate is expected to increase from the current 30 – 45 percent in the next 40 years
GOVERNMENT POLICIES AND REGULATORY FRAMEWORK
? Investment Approval: Automatic investment approval up to 100 per cent foreign equity for NRI and overseas corporate bodies. These investments are allowed in food processing segments such as coffee and tea ? FDI in organized retail: India currently allows 100 per cent FDI in Cash & Carry segment and 51% in single-brand retail, which is expected to be further increased to 100%. India is also expected to allow 51% FDI in multi-brand retail, which will boost the nascent organized retail market in the country ? Priority Sector: The Government of India recognizes food processing and agro industries as priority sectors ? Relaxation of license rules: Industrial licenses are not required for almost all food and agro-processing industries, barring certain items such as beer, potable alcohol and wines, cane sugar, and hydrogenated animal fats and oils as well as items reserved for exclusive manufacturing in the small-scale sector ? Statutory Minimum Price: In October 2009, the government amended the Sugarcane Control Order, 1966, and replaced the Statutory Minimum Price (SMP) of sugarcane with Fair and Remunerative Price (FRP) and the State-Advised Price (SAP)
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SEGMENT OVERVIEW
Market Segment
10% 2% 15% 53% Tobacco 20% Food and Beverages Personal Care
FMCG
Household Care Personal Care Food & Beverages
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? The detergents segment dominates the household care segment and has been growing at an annual growth rate of 10-11% in the past five years ? Local and unorganized players account for a major share of the total volume of the detergent market ? The Household care segment is plagued by intense competition and high level of penetration. With rapid urbanization, emergence of small pack sizes and sachets is picking up
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? The Food and Beverages segment comprises of the food processing industry, health beverage industry, bread and biscuits, chocolates & confectionery, Mineral Water and ice creams ? The three largest consumed categories of packaged foods are packed tea, biscuits and soft drinks ? The Indian hot beverage market is dominated by tea and the major share of the tea market is dominated by unorganized players ? India is one of the fastest growing branded restaurants markets in the world, where the organized eating-out market is currently estimated at US$ 2 billion and growing at CAGR of 25%
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Future perfect A study conducted by Boston Consulting Group (BCG) and Confederation of Indian Industry
(CII) titled ‘The Tiger Roars’, has indicated that the Indian FMCG market size is in excess of USD 33.4 billion ( ~17% CAGR in the last 5 years). It is poised to grow 3.6 times between 2010 and 2020, faster than most other emerging markets. The consumer sector story in India remains intact and is expected to continue on a secular growth trend driven by favourable demographics, increase in per capita consumption levels and increase in penetration. The demographic factors combined with rising per capita disposable incomes are expected to fuel consumption growth in India for a long period of time.
2000
25
20 1500 15 1000 10 500 5
0
0
Source: HDFC research
Size(INR)
Growth(%)
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Favorable demographics
More than half of India's population is younger than the age of 25 years and the entry of this group into the working population over the next few decades is expected to spur India's economic growth Demographic Divided
100% 80% 60% 40% 37% 20% CY90 CY95 <15 year CY00 15-60 year 36% 34% 32% CY05 30% CY10 28% CY15 57% 57% 58% 60% 62% 63%
7%
7%
8%
8%
9%
10%
>60 year
? ? ?
In 2010, the working age population (people over 15 years old) was 1,125 mn in China. In India it was 850 mn. The median age of China’s population was 34 years, in India it was only 25 (for comparison, the median age in Europe is 43 years). In absolute terms, in 2040 there will be around 1 billion working age people in India compared with 0.9 billion in China.
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Big middleclass, increasing disposable incomes The average household income is set to rise nearly 3 times between 2010 and 2020. The income pyramid in India which typically had a wide base of ‘struggler’ households (having per capita income <USD 3,300) is quickly becoming a diamond, as household incomes of the middle income groups grow.
? Also, higher per capita disposable income and Monthly per Capita Expenditure (MPCE) creates a strong case for sustained FMCG market enlargement.
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? Rural MPCE has outpaced urban MPCE in last two Years. As rural MPCE grew by 17.5% CAGR, urban MPCE grew by 16% CAGR. This trend was visible in most consumer companies’ sales as they reported Higher rural growth vis-à-vis urban growth in past two
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Urbanization ? By 2020 the percentage of India’s population living in cities will rise to 35% from 31% in 2010. Urban dwellers not only tend to increase their purchases but also spend on more items thereby giving a boost to consumption. ? Urban population, currently at ~380mn, is expected to touch 590mn by 2030 (2.5% CAGR.
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Rural India will continue to bolster demand Rural India contributes to a third of the FMCG sector in India. Since CY08 (barring CY11) rural market has outgrown urban. Nielsen estimates that by 2025, the fast-moving consumer goods (FMCG) market in rural India will hit $100 billion and that inflation and pricing will be outstripped by consumption
India's vast "media dark" rural market over the past decade experienced significant exposure to consumer goods products due to the surge in reach of satellite television. As per the industry sources, 60% of DTH addition comes from rural India which emphasizes on ever-increasing reach of media. Thereby driving the aspirations of rural India to use products like deodorants, conditioner, etc which is not linked with income growth. There has been a gradual change in rural Indian consumers’ shopping habits. Whi le small-sized packages are vital for entry into the market, as purchasing power increases, rural consumers are increasingly buying larger packs at a lower cost per serving. Retailers who cater to these changing needs by offering a portfolio of products that provide a value proposition will be poised for growth.
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Companies are more than aware about this colossal opportunity and have single mindedly focused on expanding their reach in rural India. Companies are increasingly focusing on rural expansion with specific products and smaller SKUs. HUL has tripled its rural reach from early 2010 (a year before target). Its continued focus on rural distribution is evident from its 'Shakti Ammas/ Shaktimaans’ initiative, a network of self-help groups that distribute the company's products in remote villages (population is below 2,000). Emami initiated Project Swadesh in 2010 with an intention to increase rural coverage. The company created a new segment—rural—covering towns/villages with a population of less than 50,000 under Project Swadesh. The company adopted a hub-and-spoke model in these areas by appointing super-stockists and sub-stockists. Through Project Swadesh, in which its agents moved around villages in vehicles,Emami had reduced its dependency on wholesalers. By March 2012, the company had 160 superstockists and 4,000 sub-stockists. As a result, the direct rural reach grew substantially in 2011-12 and now contributes about 23 per cent of total sales. While the direct distribution channel, which has reach in 10,000 villages across the country, is contributing 23 per cent of the sales, the company aims to take it to 35-38% in next three years. Currently, including the direct and indirect channels, rural markets contribute about 45 per cent of total sales, which is expected to be above 50% in next 3 years. This strategy has boosted the sales of brands like Boroplus and Navratna and also the smaller brands. The company had also reached out to the rural consumers via marketing in local events like Kumbh Mela and through cultural shows like Jatras. Dabur has initiated ‘Project Double’ which is aimed at doubling the direct distribution reach in rural markets, customise trade promotions and provide focused servicing through a dedicated sales team in these markets. Thereby, the company plans to have direct access to some 27,000 villages with more than 3,000 people this fiscal. For the same, the company has identified 10 states that contribute 72% of the entire FMCG sales in the country. Under the new strategy, Dabur segmented its products into two - those operating in larger urban markets requiring exclusive category focused sales and those meant for smaller towns and rural markets requiring an integrated sales force. 36 | P a g e
GSK Consumer: Currently, rural contributes around 26-27% sales to GSK consumer. GSK Consumer has been making efforts to tap into this market with various distribution initiatives and specialized packaging in smaller SKUs (INR 5, INR 10 and INR 15). These initiatives are likely to increase contribution from rural markets. The company is targeting to reach incremental ~10,000 villages (total villages: ~50,000) in year 2012. Also, sachet (18 grams sachet which is at Rs. 5) is growing at a very significant upward of 45% growth. These initiatives will contribute incremental ~750 mn to revenues
Low penetration, low per capita consumption ? Low penetration and low per capita daily consumption offers room for further growth. This is especially true for categories like packaged food, Deodorants, Mosquito repellent, skin cream, etc indicating untapped market potential. ? Penetration gap between urban and rural market makes us more confident of existing opportunity in rural India. ? Though some categories (toothpaste, detergents, etc) have achieved high penetration, still significant growth opportunities exists by selling more to same consumer due to their lower per capita consumption.
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?
Increased disposable income, change in lifestyle, burgeoning middle class and more money in the hands of rural population can accelerate consumption and improve penetration.
Macro situation turns a tad adverse Currently macroeconomic scenario is in a tight spot as India faces a deceleration in Industrial production and GDP growth. Steep inflation and the resultant high input costs coupled with adverse currency movements and reduced employment opportunities (esp. in urban India) are some of the other challenges in the Indian market.
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?
Sustained inflation dampens consumer confidence and this is evident from Private final consumption expenditure (PFCE) growth, an official estimate of consumer spending fell to 3.98% in the June quarter over the year-ago period after growing by 4.86% in the same period the previous year
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In the worst-case scenario, the Kelkar committee said that the fiscal deficit would be 6.1% of GDP, instead of 5.1%, if corrective steps are not taken. Also, GDP estimates for FY13E have come down to sub 6 levels. S&P in April had changed the rating outlook of India from stable to negative, reflecting the possibility of a downgrade. The country's present rating is BBB-(Negative), the lowest investment grade rating, and a downgrade would result in India's rating slipping to junk status, raising the cost of overseas borrowings by domestic corporates. Inorder to avoid rating downgrade and move on the path of fiscal consolidation; there is high likelihood that government spending may be at moderate levels (this was witnessed in FY12 as well). Moderation in spending may impact consumer demand esp. in rural India (spends on NREGA down ~25% in FY12).
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Consumer confidence deteriorates As per the Consumer Confidence Survey: September 2012 conducted by RBI, for the first time the net response on perceptions about current economic conditions turned negative though sentiments about current and future economic conditions have been declining over the last four quarters. There has been a noticeable drop in the positive perceptions on household circumstances, income and price level. Also, there has been a sharp decline in Future Expectations Index.
FMCG companies are last to get impacted CNX FMCG index is trading at 100% premium to NIFTY (5-year average premium: 70%). The FMCG pack has outperformed the broader market by ~25% YTD owing to growth visibility, cleaner corporate governance, resilient demand, RM tailwinds, higher interest rates. But this is changing…
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Rate cuts to narrow the valuation gap
With imminent rate cuts, investors might switch to rate cyclical from defensives thereby narrowing premium between FMCG pack and NIFTY. ? Also, as GDP growth is expected to be sub 6% in FY12E (FY09: 6.7%), government spending is expected to mellow down due to governments focus on fiscal consolidation, consumer demand is expected to slow down (already witnessed in discretionary space) thereby impacting growth for FMCG cos
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? Major Players in FMCG Sector
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Company analysis
(GCPL Case study)
(Chapter-4)
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Incorporation Year Industry Group Main Product
2000 FMCG Home care Personal Care Hair Care
Board OF Director Chairman Managing Director Director and President Chief Strategy Officer President, International operations Executive Vice President
Mr. Adi Godrej Mr. Mahendran Ms. Nisaba Godrej Vivek Gambhir Shashank Sinha P. Ganesh
? Godrej Consumer is among the leading FMCG companies in India - second largest player in soaps and largest in hair color ? Godrej Consumer brands, which include Good knight, Cinthol, Godrej No. 1, Expert,Hit, Jet, Fairglow, Ezee, Protekt and Snuggy, among others, are household names across the country ? Major brands include Godrej Hair Dye (liquid and powder), Godrej Kesh Kala oil and Nupur hair dyes in the lower end and Renew and Coloursoft in the higher segment and give stiff competition to foreign brands in the hair colour segment ? In June 2009, GCPL completed the acquisition of 49% stake in Godrej Sara Lee Limited which had several leading brands such as Good Knight, JET, HIT, Brylcreem and KIWI ? The company employs 950 people and has three state-of-the-art manufacturing facilities at Malanpur (M.P.), Guwahati (Assam) and Baddi (H.P.)
GCPL's Current Market Share
50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Home care - HI Personal Wash Soap Hair Care - Hair Colors 9.1% 39.7% 28.7%
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Company Background
Godrej Consumer Products Limited (GCPL), the flagship company of Godrej Group earlier operated in two categories - soaps and hair colors till FY09. Post FY09, GCPL overhauled its business as per a new “3 X 3” strategy that involves having a presence in three categories across three continents. The household insecticides business (which was earlier a joint venture between another Godrej group company and Sara Lee) was merged into GCPL. GCPL manufactures and distributes personal wash, home care and hair care products in India and internationally (1/3 rd of revenues come from international operations). The company also has a strong emerging presence in markets outside India. With the acquisition of Keyline Brands in the United Kingdom, Rapidol, Kinky Group, Tura, Darling Group in Africa and Issue Group, Argencos, Cosmetica Nacional in Latin America, GCPL is best placed to benefit from presence across these emerging markets. As part of increasing its global footprint, the company has also acquired Megasari Group, a leading household care company in Indonesia.
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SWOT ANALYSIS OF GCPL
Strengths
Opportunities
• • • •
Leader among India’s FMCG companies Some brands in 100 most trusted brands Presence in more than 60 countries Widespread distribution network across India
• • •
Tap rural markets and increase penetration in urban area Mergers and acquisitions to strengthen the brand Increasing purchasing power of people thereby increasing demand
SWOT Analysis of GCPL
Weaknesses
Threats
• •
Market share is limited due to presence of other strong FMCG brands High Geography concentration stiff competition from big domestic players and international brand
• • •
Intense and increasing competition amongst other FMCG companies .FDI in retail thereby allowing international brands .Competition from unbranded and local products
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GCPL Business Hit in “HIT”
? Home insecticide is the market leader in all formats. Growing faster that category growth (since past 8 quarter). Reason for this growth is the aquition of Sara lee (South Africa). With this HI acquisition GCPL have not only diversified its business But also scaled up its domestic business. Also, Gradual switch from Coil to Electronic will bring more Profitability...and it will reduce Dependence on Low margin Soap business (From 41% in FY 10 to 22% in FY12). ? Soap Business is consistently delivering resilient growth (4QFY12:30%, 1QFY13:42: 2QFY13:24%). And Re-launch of cinthol shop would aid to the growth. ? Hair care is the only category which is not performing well but resent entry into hair cream base at highly competitive price (40% lower than competitor) has witness that it would help to gain market share of local player.
Growth Rate for GCPL
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 4% 17% 10% 10% 9% 6% 20% 29% 39% 30% 25% 18% 13% 19% 17% 32% 25% 15% 9% 11% 12% 10% 31% 25% 30% 28% 23% 24% 20% 42%
Source: GCPL
HI
Soap
Hair Colour
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GCPL to Take Synergistic Benefit
The company plans to derive synergistic benefits by taking its existing products to other geographies: Hair color to Indonesia, HI to South Africa and Argentina, and plans to launch HIT Magic Paper in India. Further, the company plans to expand in neighboring countries of Indonesia and Argentina. Recent attempts of cross pollination include: 1) Launching HI in Nigeria, 2) Bringing AER, HIT magic paper to India, 3) Launch of hair color products from LatAm business in India.
Geography Indonesia
Category Insecticides Hair Colour
Launch year FY12 NA
Opportunity Status Initially, GCPL had no presence in the coils segment, now ramping up with the Hit magic paper which has made inroads into coil consumers Evaluating various formats including powder and crème Applied for Product registration in Nigeria, pan Africa launch also planned Launched Caucasian hair colour from the Latin American business, gained 20% volume share in South Africa Already a 90% market share in ethnic hair colour in South Africa, product will be introduced pan Africa using the Darling distribution network Conducting Market Study
Africa
Insecticides Hair Colour
FY 14
FY12 Hair Colour Latin America Insecticide India Hair Colour FY13 Insecticide Air Care FY14 FY13
FY13 FY14
Crème sachet technology from Latin American business can help GCPL have a differentiated proposition for the premium hair colour market in India GCPL looking to launch the successful paper based insecticide in India to gain share Recently launched a range of air care products.
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INTERNATIONAL BUSINESS
GCPL’s international business is likely to contribute 50% of total revenue post complete acquisition of DGH (viz. FY14E). Also, in most geography, GCPL business enjoys market leadership position with immense growth opportunities. Integration of DGH and stabilization of LatAm businesses holds key for long term sustained profitability of the company.
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Domestic business has transformed into a stronger entity
GCPL’s domestic business has Double in the past Two year after merger of the Godrej Sara Lee business (home insecticides) into the company. Prior to the merger, GCPL’s revenue mix was dominated by soaps, which formed 68% of revenue in FY09. Soaps is one of the most mature categories in India with penetration levels well in excess of 90%; as a result, growth potential for the category is relatively low which led soap business to come down to 33% in FY12. After the merger of the business, the domestic revenue mix has completely transformed for the better, with home insecticides now forming 44% of domestic revenue.
(Domestic revenue mix 09 dominated by soap) (Domestic revenue mix 09 dominated by Insecticides)
Domestic Revenue mix FY09
7% 25% Hair care Soap 68% other
Domestic Revenue Mix FY12
Hair care Soap HI 11% other
12%
44%
33%
Source: GCPL
Source: GCPL
Consolidated Revenue break-up%
HomeCare HairCare Personal Wash Others
21% 41% 18% 20% FY10
14% 21% 17% 48% FY11
12% 22% 19% 47% FY12
11% 21% 22% 46% FY13E
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Balance sheet deleveraging to continue; ROEs to improve gradually.
GCPL’s debt: Equity ratio has come down from 1x in March 2011 to 0.5x in March 2012, aided by strong earnings growth and working capital reduction. There is also further scope of reduction in working capital in international business. We can also see free cash flow to deleverage the balance sheet further in spite of the upcoming payment of acquisition in Darling Group.
D/E
1.2 1 0.8 0.6 0.4 0.2 0 FY11 D/E FY12
While GCPL’s consolidated ROE has depressed in past two year from 45% to 25% in FY10 & FY12 respectively. It is the result of five big acquisitions which company have made during the past 2 year where most of investment has deploy. All acquired business is classic FMCG business which is generating high cash flow and no need for further investment. These businesses are delivering 15% to 20% growth. As a result, company’s ROE should improve gradually over the coming year.
ROE
50% 45% 40% 30% 25% 20% 10% 0% FY10 FY11 FY12 FY13 FY14 24% 36% 28% ROE
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Godrej Consumer Product vis-a-vis Indian Peer
Revenue - Comparison
INR-mn FY10 GCPL 20,412 Growth(%) Emami 10,217 Growth(%) Dabur 33,914 Growth(%) GSK Consumer 23,685 Growth(%) Marico 26,608 Growth(%) Source: GCPL, HDFC research report
FY11
36,430 78.5% 12,471 22% 41,045 21.0% 27,649 16.7% 31,350 17.8%
FY12
48,662 33.6% 14,535 17% 53,054 29.3% 31,710 14.7% 40,483 29.1%
FY13E
65,776 35.2% 17,056 17% 62,065 17.0% 36,879 16.3% 47,372 17.0%
CAGR%
34% 17% 23% 15% 23%
GCPL has reported significant high growth in its Topline growth in last couple of years, which has led it to achieve CAGR of 34% which is higher in its entire industry peer. Dabur and Marico have grown at CAGR of 23%While GCPL has shown more than double growth in the same time period. GCPL’s post FY10 Acquisition in international business has helped it to achieve such a tremendous growth. We expect GCPL to report close to 65mn in FY13E.
EBITDA Margine(%)
FY10
GCPL EBITDA Margine(%) Emami EBITDA Margine(%) Dabur EBITDA Margine(%) GSK Consumer EBITDA Margine(%) Marico EBITDA Margine(%) 4,103 20.1% 2,465 24.1% 6,300 18.6% 4,365 18.4% 3,752 14.1%
FY11
6,447 17.7% 2,534 20.3% 8,001 19.5% 5,043 18.2% 4,181 13.3%
FY12
8,776 18.0% 2,968 20.4% 8,902 16.8% 5,939 18.7% 4,844 12.0%
FY13E
17,471 26.6% 3,445 20.2% 10,482 16.9% 6,370 17.3% 6,300 13.3%
Source: GCPL, HDFC research repots GCPL’s FY13E EBITDA margins estimated 26.6% that are higher than Emami,Dabur,GSK consumer & Marico that are expected to report 20.2%,16.9%,17.3% and 13.3% respectively. GCPL has shown consistent growth in EBITDA margin while some of its Peer has decreasing trend. We further expect GCPL to command higher EBITDA than its peer in next coming year.
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9000 8000 7000 6000 5000 4000 3000 2000 1000 0 FY10 Revenue FY11 FY12 EBIDTA Profit Margin FY13 FY14 PAT Margin 2044 4866 3646 6270 20.1% 16.6% 17.7% 14.1% 18.0% 14.9% 12.0% 7810 17.30% 13.7% 19.40%
25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Barring for soaps, in the product categories of Hair Colors, Hair Extensions and Household Insecticides, GCPL enjoys leadership status. The reformulated 3x3 growth strategy has enabled the company to consolidate its product portfolio and market dominance and more than double its revenues from `1,396.6 crore in FY09 to `3,646.1 crore in FY11.We expect the company to continue to maintain this pace of growth over FY14. Accordingly, revenues are expected to reach `7,811 crore (CAGR of 28.9%) by FY14on the back of organic growth and acquisitions
Key risks The key risks to our call on GCPL are as follows: ? A major economic slowdown in any of the international markets that GCPL operates in can impact consumption growth. ? Competitors in insecticides taking price cuts to gain back market share lost to GCPL in the past 2 years. ? Any sharp devaluation in currencies that GCPL’s international business operates in will impact earnings translation.
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Income Statement
Y/E, 31st March Net Sales EBITDA EBITDA margin (%) Depreciation EBIT Other income Interest exp/ (inc) PBT PBT margin (%) Taxes Extra ord exp/ Minority Interest PAT (Reported) Less: Extraordinary Income /Others Adj PAT FY11 36,430 6,447 18% 499 5,948 698 519 6,449 18% 1,298 FY12 48,662 8,776 18% 644 8,131 520 658 9,773 20% 2,280 FY13E 62,701 10,850 17% 702 10,148 520 614 9,952 16% 2,398 FY14E 78,099 15,153 19% 774 14,379 520 614 14,141 18% 3,436 FY15E 93,324 18,106 19% 846 17,260 614 16,473 18% 4,036
5,147 331 4,883
7,267 2,002 5,728
7,554 7,554
10,705 10,705
12,437 12,437
Balance sheet Y/E, 31st March Liabilities Equity share capital Total Res. & Surplus Total Shareholders’ funds Convertible debt Others Total loans Deferred tax lia. (net) Total liabilities Assets Net fixed assets Capital WIP Total non-current assets Inv - non current Current assets Inventories Sundry debtors Cash & cash equivalents 4,394 3,840 7,839 4,725 5,187 6,189 8,507 7,844 7,857 7,876 15,373 154 30,931 0 15,464 376 40,014 0 17,048 89 42,061 0 18,388 176 44,277 0 19,884 234 46,610 0 20,054 14 37,320 16,458 111 44,720 16,458 111 50,763 16,458 111 59,327 16,459 111 69,278 324 16,928 17,252 20,054 340 27,812 28,152 16,458 340 33,854 34,195 16,458 340 42,418 42,758 16,458 340 52,368 52,708 16,459 FY11 FY12 FY13E FY14E FY15E
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Cash Short term loan &advances Other current assets Total current assets Total current liabilities Total provisions Net current assets Misc. expenditure Total assets
2,269 4,437 122 15,062 8,673 6,389 0 37,320
6,399 1,181 124 20,269 15,563 4,706 0 44,720
12,342 1,285 124 25,128 16,426 8,702 0 50,763
18,734 1,601 124 36,809 21,759 15,050 0 59,327
28,925 1,913 124 46,696 24,028 22,668 0 69,278
Cash flow Statement Y/E, 31st March Cash from operations PBT Tax paid Dep & amortization Working capital changes Others Net cash from operations Cash from investments Capital expenditure Sale/purchase of investments Net cash from investments Cash from financing Issue of shares & sh. premium Dividends paid Debt change Others Net cash from financing Net change in cash 2,542 1,631 19,685 0 20,612 (4,106) 3,616 1,461 (3,597) 882 (542) 2,934 (1,511) 1,511 0 0 (3,021) 4,433 (2,141) 2,141 0 0 (4,282) 4,250 (2,487) 2,487 1 0 (4,974) 7,704 14,999 (670) 26,760 (11,868) 0 10,248 15,410 0 2,749 2,113 0 2,989 2,343 0 3,180 2,042 13,725 10,203 11,521 15,858 499 3,605 644 (5,813) 702 (1,948) 774 (43) 846 (2,575) 5,147 7,267 7,554 10,705 12,437 FY11 FY12 FY13E FY14E FY15E
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Financial Ratios Growth Ratios %: Gross Sales Net Sales Gross Profit EBIDTA Profit EBIT Profit EBT Profit PAT Liquidity Ratios Current Ratio Quick Ratio Leverage Ratios Debt to Equity Ratio Debt Ratio Capital Employed (CE)/ Net worth Ratio Interest Coverage ratio Activity Ratio/ Turnover Ratio Debtor turnover (x) Avg. Collection Period (Days) Creditor Turnover(x) Avg. credit period (Days) Inventory Turnover (x) Avg. Inventory Period (Days) Asset Turnover Fixed Asset Turnover Total Asset Turnover Profitability Ratios % Gross Profit Margins EBIDTA Profit Margin EBIT Margin EBT Margin PAT Margin ROE = (PAT-Pref Dividend)/ Avg. Networth
FY11
FY12
FY13E
FY14E
FY15E
79% 78% 73% 57% 54% 54% 54%
34% 33% 34% 36% 37% 37% 52%
29% 29% 26% 24% 25% 25% 2%
25% 25% 28% 40% 42% 42% 42%
19% 19% 20% 19% 20% 20% 16%
1.74 1.23
1.30 0.80
1.53 1.21
1.69 1.30
1.94 1.62
1.16 0.54 2.16 11.46 9.49 38.47 3.34 109.14 4.19 87.20 2.37 0.79 52.04% 17.68% 16.31% 17.69% 14.12%
0.58 0.37 1.59 12.35 10.30 35.44 3.56 102.49 3.50 104.31 12.33 0.81 52.35% 18.03% 16.71% 20.08% 14.93%
0.48 0.32 1.48 16.52 10.13 36.03 4.69 77.78 5.88 62.11 3.68 0.93 51.38% 17.30% 16.18% 15.87% 12.05%
0.38 0.28 1.39 23.41 9.96 36.66 3.81 95.81 4.34 84.06 4.25 0.96 52.70% 19.40% 18.41% 18.11% 13.71%
0.31 0.24 1.31 28.11 11.85 30.81 4.58 79.74 5.61 65.04 4.69 1.00 52.75% 19.40% 18.49% 17.65% 13.33%
36%
25%
24%
28%
26%
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? Industry Snapshot
Company Name Dabur Emami GSK Consumer Godrej Consumer Marico
P/E(x) FY12 FY13E FY12 34.9 29.5 32.9 29.5 36.2 31.1 47.2 35.3 42.7 34.2
P/S(x) FY13E 4.3 6.1 4.8 5.4 3.5
P/BV(x) EV/EBITDTA(x) EV/Sales(x) OPM % ROE % ROCE % EPS GROwTH %Sales Growth % FY12 FY13E FY12 FY13E FY12 FY13E FY13E FY13E FY13E FY13E FY13E 3.6 13.0 10.3 25.3 21.3 4.3 3.6 15.0 39.3 28.6 18.5 17.0 5.1 12.9 11.5 30.0 25.4 6.1 5.1 18.9 41.3 38.3 11.6 17.3 4.1 11.5 9.6 24.6 20.9 4.8 4.1 17.6 34.5 42.9 16.3 16.3 4.2 8.8 7.7 30.5 23.9 5.4 4.2 16.3 21.3 20.0 20.7 31.1 2.9 11.9 9.3 28.8 22.0 3.5 2.9 11.5 30.5 30.3 25.0 18.2
Recommendation We initiate coverage on Godrej Consumer Products Ltd (GCPL) as a BUY with a Price Objective of `883 (target 20x FY14 EPS) over a period of 21-24 months representing a potential upside of ~23%. At CMP of `728, the stock is trading at 18.1x and 15.1x its estimated earnings for FY13 and FY14, respectively. Driven by global acquisitions of Darling Group (Africa) & Cosmetica Nacional (Latin America) and strong growth of the Indian household insecticides business, we expect GCPL’s consolidated revenues to grow at 34.4% CAGR over the forecasted period FY12-FY14. In our opinion, our estimates are conservative and we expect a substantial re-rating of the price earnings (PE) multiple. Currently, the discount to peers is a mispricing which should narrow as the acquisitions start delivering.
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Conclusion:
As per Analysis, we can say that FMCG has tremendous growth rate with relevant other Growing sector. Over the longer term, the Indian consumer sector will ride several external/internal opportunities: favorable demographics, burgeoning middle class, increase in per capita income, urbanization, lower penetration levels, low per capita consumption and increase in distribution reach. Also, the land and gold driven wealth effect in rural India will keep rural demand unscathed. Steady drumbeat of negative news (sustained inflation, GDP slowdown, weak rupee, reduction in disposable income and consumers’ perception about their economic situation turning negative) threatens FMCG valuations. The FMCG pack is trading at a 20% premium to its 5 yr mean valuation (100% premium to NIFTY) and therefore looks vulnerable to us in near term. Also, with imminent rate cuts, investors might switch to rate cyclical from defensives.
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WEBLIOGRAPHY
1. www.moneycontrol.com 2. http://www.researchbytes.com 3. www.godrejcp.com 4. en.wikipedia.org/wiki/Economy_of_India 5. www.equitymaster.com/
BIBLIOGRAPTHY
1. C. Viswanatha Reddy and J Viswa Pavani (2012) Intrinsic Value Estimation Through Fundamental AnalysisIndian Journal of Finance ,Volume 6, Number 2, February 2012 49-57 2. Dyna Seng Jason. R Hancock (2012) Fundamental Analysis and the Prediction of Earnings, International Journal of Business and Management, Volume 7, No.3, February 2012 32-46 3. Venkatesh C.K. and Madhu Tyagi (2011) The Use of Fundamental and Technical Analysis by Stock Exchange Dealers: Indian Evidence, Middle Eastern Finance and Economics, Issue 14 (2011) 73-82. 4. Venkatesh C.K., Madhu Tyagi and Ganesh (2012) Fundamental Analysis And Its Usage In Indian Capital Markets: A Survey, Bangladesh Research Publications Journal, Volume 7, Issue 1 ,(2012) 46-54
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doc_702980308.pdf
As a part of our study Curriculum it is necessary to conduct a research project. It provides to opportunity to understand the particular topic inside out and which leads to through to that topic. The title of the project is Fundamental analysis of FMCG sector. This project is to gain knowledge about FMCG sector and its segments. This project focuses on make to the good portfolio or suggests the sound portfolio regarding
the FMCG sector by selecting good company from tool of ratio analysis. This project has been taken into consideration to guide investor to earn the maximum profit by reducing the risk in future of sound company industry. This report covers FMCG sector its segments, scope and its future prospect. The report concentrate on Godrej consumer Product Company, a major player in FMCG sector and accordingly the data is collected and analyzed. Tool used to analyses data is ratio analysis which gives the clear picture about company and dividend discount model to come to the target price of GCPL and accordingly conclusion and recommendation are given. analyzing the recent trends fundamental analysis in particular
1|Page
.
INTRODUCTION TO FUNDAMENTAL ANALYSIS (Chapter-1)
2|Page
What is analysis?
The examination and evaluation of the relevant information to select the best course of action from among various alternatives. The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movement in the market.
What is technical analysis?
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
What is fundamental analysis?
Fundamental Analysis involves examining the economic, financial and other qualitative and quantitative factors related to a security in order to determine its intrinsic value. It attempts to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Fundamental analysis, which is also known as quantitative analysis, involves delving into a company?s financial statements (such as profit and loss account and balance sheet) in order to study various financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts, brokers and savvy investors.
Many analysts and investors focus on a single number--net income (or earnings)--to evaluate performance. When investors attempt to forecast the market value of a firm, they frequently rely
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on earnings. Many institutional investors, analysts and regulators believe earnings are not as relevant as they once were. Due to nonrecurring events, disparities in measuring risk and management's ability to disguise fundamental earnings problems, other measures beyond net income can assist in predicting future firm earnings.
Two Approaches of fundamental analysis
While carrying out fundamental analysis, investors can use either of the following approaches: 1 .Top-down approach: In this approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector. 2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses, irrespective of their industry/region.
How does fundamental analysis works?
Fundamental analysis is carried out with the aim of predicting the future performance of a company. It is based on the theory that the market price of a security tends to move towards its 'real value' or 'intrinsic value.' Thus, the intrinsic value of a security being higher than the security?s market value represents a time to buy. If the value of the security is lower than its market price, investors should sell it.
The steps involved in fundamental analysis are:
1. Macroeconomic analysis, which involves considering currencies, commodities and indices. 2. Industry sector analysis, which involves the analysis of companies that are a part of the sector. 3. Situational analysis of a company. 4. Financial analysis of the company. 5. Valuation
The valuation of any security is done through the discounted cash flow (DCF) model, which takes into consideration:
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1. Dividends received by investors 2. Earnings or cash flows of a company 3. Debt, which is calculated by using the debt to equity ratio and the current ratio (current assets/current liabilities) Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. A good financial analyst will build in financial ratio calculations extensively in a financial modeling exercise to enable robust analysis. Financial ratios allow a financial analyst to: ? Standardize information from financial statements across multiple financial years to allow comparison of a firm?s performance over time in a financial model. ? Standardize information from financial statements from different companies to allow apples to apples comparison between firms of differing size in a financial model. ? Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial model.
In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are: ? Performance ratios ? Working capital ratios ? Liquidity ratios ? Solvency ratios
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WHY ONLY FUNDAMENTAL ANALYSIS Long-term Trends
Fundamental analysis is good for long-term investments based on long-term trends, very long-term. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies.
Value Spotting
Sound fundamental analysis will help identify companies that represent a good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.
Business insights
One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such pains taking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. A stock's price is heavily influenced by its industry group. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or incomeoriented (high yield).
Knowing Who's Who
Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. This has happened with many of the pure internet retailers, which were not really internet companies, but plain retailers. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations. The charts of the technical analyst may
give all kinds of profit alerts, signals and alarms, but there’s little in the charts that tell us why a group of people make the choices that create the price pattern
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Literature Review
Sugandharaj Kulakarani (2011) examined the application of fundamental analysis with reference to ONGC. The changes in the share value depends not only how company is performing but also the industry and economic factors inspire the value of the stock and that will be reflected in the share price. The fundamental analysis influence the fluctuation of price in the market and use of fundamental analysis help investors to find the intrinsic value of stocks that they wishes to buy. Dyna Seng Jason. R Hancock (2012) examined the importance of each phases of fundamental analysis in their study fundamental analysis and the prediction of earnings. The study suggested that the economy and industry related factors have slight influence on earnings and it concluded that financial statements are more useful to predict the earnings and returns. Venkatesh C.K. and Madhu Tyagi (2011) based on the survey examined the application of fundamental analysis and technical analysis among stock brokers and fund managers in Indian stock market. The study observed significance of each technique used to predict the market behavior by the experts in the market and concluded that both the techniques are complimentary to each other. Venkatesh C.K., Madhu Tyagi and Ganesh (2012) present the importance of fundamental analysis and technical analysis among brokers, fund managers and portfolio managers in the Indian stock market to foresee the share price movement. The outcome of the study shows that among EIC factors economy and company factors play a major role in forming the forecast and respondents rely on both the techniques to pretend the market movement
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OBJECTIVES OF THE PROJECT:
1. To gain in depth knowledge about FMCG sector 2. To find the intrinsic value of particulars FMCG Company or its Growth prospective. 3. To Understand the factor that affect the Movement of the Script 4. To carry out an economic analysis and industry analysis that provides cues to investors. 5. To analyses the financial health of the selected FMCG stocks. 6. To analyze the FMCG industry to see the revenue growth driver in near Future.
SCOPE AND RELEVANCE OF THE PROJECT:
1. This study serves to answer questions, such as: a. Is the company’s revenue growing? b. Is it actually making a profit? c. Is it in a strong-enough position to beat out its competitors in the future? d. Is it able to repay its debts?
2. Study can be used for investor to make investment decision in Equity Investment. 3. Study can also use by Broking Firm for assisting Investors regarding Equity Investment.
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Research Methodology
Problem Statement: Fundamental analysis with ref. to FMCG Sector Assumption and benefit of study Assumption: The assumption of this study is that’s the majority of information that goes into the analysis comes from the company itself. Company employee investor relation manager especially to handle the analyst community and release information. When reading these reports, it is important to take into consideration any biases a sell side analyst may have. The buy side analyst, on other hand is analyzing the company purely from an investment standpoint for portfolio manager. Benefits: Fundamental analysis helps in: Identifying the intrinsic value of security Identify the long term opportunities, since it involve real time data. RESEARCH DESIGN This research was descriptive and conclusion oriented research. •Conclusion Oriented Research: -Research designed to assist the decision maker in the situation. In other words it is a research when we give our own views about the research. •Descriptive Research: A type of conclusive research, which has as its major objective the description of somethingusually market characteristics or functions. In other words descriptive research is a research where in researcher has no control over variable. I have tried to describe the situation of GCPL company whether they are fundamentally strong are not. Research tool used 9|Page
•Tables: This tool was used to present the data in tabular form. •Bar Graphs and Pie Charts: These tools were used for analysis of data Data collection: Data collection here is secondary data for research and the data is being collected from company’s annual report, press release, transcript and use of various search engines
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ECONOMIC ANALYSIS (Chapter- 2)
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INDIAN ECONOMY
The economy of India is the tenth-largest in the world by nominal GDP and the third largest by purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRICS. On a per capita income basis, India ranked 140th by nominal GDP and 129th by GDP (PPP) in 2011, according to the IMF. India is the nineteenth largest exporter and tenth largest importer in the world. Economic growth rate stood at around 6.5% for the 2011–12 fiscal year.
Trade WTO, SAFTA, G-20 and others Fiscal year 1 April – 31 March Rank 10th (nominal) / 3rd (PPP)
Economy of Republic of India
Currency
1 Indian Rupee (INR) ( ) = 100 Paise
The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist policies and importsubstituting economy that failed to take advantage of the post-war to expansion of trade. This model and contributed widespread inefficiencies
organizations
Statistics
GDP
$1.946 trillion (nominal: 10th; 2012) $4.710 trillion (PPP: 3rd; 2012)
GDP growth GDP per capita
5.3% (Q2, 2012) $1,514 (nominal: 139th; 2011) $3,703 (PPP: 125th; 2011]
corruption, and the failings of this system were due largely to its poor implementation. In 1991, India adopted liberal and free-market oriented principles and liberalized its economy to international trade under the guidance of Manmohan Singh, who then was the Finance Minister of India under the leadership of P.V. Narasimha Rao the then Prime Minister who eliminated License Raj a pre- and post-British Era mechanism of strict government control on setting up new industry. Following these strong economic reforms, and a strong focus on developing national infrastructure such as the Golden
GDP by sector
agriculture: 17.2%, industry: 26.4%, services: 56.4% (2011 est.)
Inflation (CPI)
CPI: 10.56%, WPI: 7.18% (Dec 2012)
Labour force 487.6 million (2011 est.) Labour force by occupation Unemployment Average gross salary agriculture: 52%, industry: 14%, services: 34% (2009 est.) 9.4% (2011 est) $1,410 yearly (2011)
Quadrilateral project by Atal Bihari Vajpayee, the then Prime Minister, the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people
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Overview
The economy was then characterised by extensive regulation, protectionism, public ownership of large monopolies, pervasive corruption and slow growth. Since 1991, continuing economic liberalisation has moved the country towards a market-based economy.By 2008, India had established itself as one of the world's fastest growing economies. Growth significantly slowed to 6.8% in 2008–09, but subsequently recovered to 7.4% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period India’s current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2010–11, according to the state Labour Bureau, was 9.8% nationwide. As of 2011, India's public debt stood at 68.05% of GDP which is highest among the emerging economies. However, inflation remains stubbornly high with 7.55% in August 2012, the highest among its BRICS counterpart India's large service industry accounts for 57.2% of the country's GDP while the industrial and agricultural sectors contribute 28.6% and 14.6% respectively. Agriculture is the predominant occupation in Rural India, accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector around 14%. However, statistics from a 2009–10 government survey, which used a smaller sample size than earlier surveys, suggested that the share of agriculture in employment had dropped to 45.5%. Major industries include telecommunications, information technology, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software and pharmaceuticals.The labour force totals 500 million workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish.In 2011–2012, India's top five trading partners are China, United Arab Emirates, United States, Saudi Arabia and Switzerland. India's total trade in goods and services has reached a share of 43% of GDP in 2005–06, up from 16% in 1990–91. In the year 2010–11 India's total merchandise trade (counting exports and imports) stands at $ 606.7 billion and is currently the 9th largest in the world. During 2011–12, India's foreign trade grew by an impressive 30.6% to reach $ 792.3 billion (Exports-38.33% & Imports-61.67%)
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Post-liberalisation period (since 1991)
In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies By the turn of the 20th century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than agricultural residents. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century
GDP of India has risen rapidly since 1991
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Sectors
Industry and services Industry accounts for 28% of the GDP and employ 14% of the total workforce. India is 11th in the world in terms of nominal factory output according data is compiled through CIA World Factbook figures. The Indian industrial sector underwent significant changes as a result of the economic liberalisation in India economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to privatisation of certain public sector industries, liberalised the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods.Post-liberalisation, the Indian private sector was faced with increasing domestic as well as foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, and relying on cheap labour and new technology. However, this has also reduced employment generation even by smaller manufacturers who earlier relied on relatively labour-intensive processes.[ Retail Retail industry is one of the pillars of Indian economy and accounts for 14–15% of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail market in the world, with 1.2 billion people. India's retailing industry essentially consists of the local mom and pop store, owner manned general stores, convenience stores, hand cart and pavement vendors, etc. Organised retail supermarkets account for 4% of the market as of 2008. Regulations prevent most foreign investment in retailing. In 2012 government permitted 51 %FDI in multi brand retail and 100% FDI in single brand retail. Moreover, over thirty regulations such as "signboard licences" and "anti-hoarding measures" may have to be complied before a store can open doors. There are taxes for moving goods from state to state, and even within states Agriculture India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 15.7% of the GDP in 2009–10, employed 52.1% of the total workforce, and despite a steady decline of its share in the GDP, is still the largest
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economic sector and a significant piece of the overall socio-economic development of India. Crop yield per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India. However, international comparisons reveal the average yield in India is generally 30% to 50% of the highest average yield in the world. Indian states Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Bihar, West
Bengal, Gujarat and Maharashtra are key agricultural contributing states of India.
Foreign direct investment
As the third-largest economy in the world in PPP terms, India is a preferred destination for FDI; During the year 2011, FDI inflow into India stood at $ 36.5 billion, 51.1% higher than 2010 figure of $ 24.15 billion. India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies were a significant hindrance. However, due to positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia-Pacific region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market
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Economic trends and issues In the revised 2007 figures, based on increased and sustaining growth, more inflows into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020, India’s GDP per capita in US$ terms will quadruple", and that the Indian economy will surpass the United States (in US$) by 2043. In spite of the high growth rate, the report stated that India would continue to remain a low-income country for decades to come but could be a "motor for the world economy" if it fulfills its growth potential. According to the official estimates, Indian economy is expected to grow at 7.6% (+/- 0.25%) in the fiscal year 2012–2013. However, leading financial organisations and economic thinktanks expect Indian economy to grow slower than official projections. Indian economic growth outlook April, 2012 – March, 2013 Organisation International Monetary Fund World Bank Asian Development Bank Nomura Morgan Stanley JP Morgan Goldman Sachs Bank of America- Merrill Lynch HSBC[193]
Standard Chartered[194] Centre for Monitoring Indian Economy [195]
Estimated GDP growth rate 6.1% 6.9% 6.5% 5.8% 5.8% 6-6.5% 6.6% 6.5% 6.2%
6.2% 7.2%
Month of projection July 2012 June 2012 July 2012 June 2012 June 2012 June 2012 May 2012 May 2012 June 2012
June 2012 July 2012
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Industry Analysis (Chapter-3)
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INDIAN FMCG INDUSTRY OVERVIEW
? Fast Moving Consumer Goods (FMCG) goods, popularly named as consumer packaged goods, play a vital role as a necessity and as an inelastic product ? The Indian FMCG sector is the fourth largest sector the economy with a total market size of Rs. 167,100crs. The market is estimated to grow to US$ 100 billion by 2025, according to market research firm Nielsen. ? In the last decade the FMCG sector has grown at an average of 11% a year; in the last five years, annual growth accelerated to 17%. ? The FMCG Industry is characterized by a well-established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments ? FMCGs are slowly and gradually positioning and deeply penetrating in the fast growing rural market. The Rural mindset is open to consumption of newer, more contemporary food categories and as a result, drives consistent growth ? Rural India accounts for more than 700 Million consumers or 70% of the Indian population and accounts for 40% of the total FMCG market ? The Rural market is a large market space with very low organized player penetration. Across the globe, the Indian rural market is probably the single largest “unit” of opportunity ? Also with changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $80 billion by 2026 in towns with population of up to 10 lakh ? The sector has a tremendous opportunity for growth in India, with the growing population, the rising incomes, education and urbanization, the advent of modern retail, and a consumption-driven society
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INDUSTRY CHALLENGES
Price of inputs
•Commodity prices fluctuate, which make it difficult to finalize raw material prices, affecting the final price of the product • Indian consumers are very price-sensitive and value conscious, making it difficult for FMCG firms to pass on the increased cost
Emergence of
Private Labels
•Private labels serve to lower the consumer’s price points, particularly at the mass level •Conflicts of interest when a retail chain has its own label whose packaging looks like category leaders’ and stocks brands of other manufacturers, (in terms of display space, promotions etc
Counterfeit and Pass-offs
•These products narrow the scope of FMCG products in rural and semi-urban market •The spurious pass off products affect large, high quality brands which have actually invested money in research and development to create their products and build brand equity
Infrastructur
•Power Costs •Transportation Infrastructure •Agricultural Infrastructur
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INDUSTRY TRENDS
Consolidation
•Indian FMCG Companies Are Consolidating Their Existing Business Portfolios
Product Innovation
•Several companies have started innovating by launching or customizing their existing product portfolios for new consumer segments •Lifestyle And Premium Range Products Are The Current Hot Targetproduct Segments Among Indian FMCG Players
Lifestyle Products
Expanding Horizons
•A number of companies are exploring the business potential of overseas markets and several regional markets
Backward Integration
•Backward integration is becoming the preferred strategy for increasing profit margins
Expanding Distribution Network
•Companies are now focused on improving their distribution networks to expand their reach in rural India
Third Party Manufacturing
•FMCG players often outsource manufacturing or processing of a certain range of products to small vendors
Focus On Enhancing Presence In Africa
•FMCG companies entering Africa as it helps to be close to consumption markets within Africa. Such foreign investments are encouraged by local governments, as they offer incentives to enter the markets
Key Trends
? Consolidation o o Indian FMCG companies are either their focus on certain market segments are consolidating their existing business portfolios. Ex: Dabur India Ltd merged with its wholly owned subsidiary, Dabur Foods Ltd, with itself.
? Product Innovation
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o o o
Several companies have taken to innovation by launching or customizing their existing product portfolios for new consumer segments. Ex: Emami Ltd launched a men’s fairness cream, Nestle India and GCMMF (Amul) have launched pro-biotic products by providing active ingredients in regular consumable products such as curd/yoghurt and ice cream
? Lifestyle ? ? ? Lifestyle and premium range products are the next target product segment among Indian FMCG Players. Ex: P&G launched its Olay range. The company also has plans to expand its existing Indian product portfolio categories from 8 to 25. HUL: The Company launched Avinace, an exquisite range of high-technology, high performance beauty services for women. ? Third Party Manufacturing o FMCG players now often outsource the manufacturing or processing of a certain range of products to small vendors. This approach will help companies focus on front end marketing more effectively. o Ex: GlaxoSmithKline Consumer Healthcare Ltd. Outsource the processing of products such as malt – based foods, biscuits and nutrition bar sweetmeats to third-party vendors. o HUL outsources the processing of its products such as soaps, synthetics detergents, and packaged tea to third party vendors. ? Expanding Horizons o o Several Indian companies are exploring the business potential of overseas markets and several regional markets. Ex: In 2008, Tata Tea acquired a minority stake in US vitamin water bottler, the Rising Beverage Company, which owns Activate brand. ? Backward Integration o Backward Integration is becoming the preferred strategy for increasing profit margins.
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? Expanding distribution networks ? ? ? Companies are now focused on improving their distribution networks to expand their rural reach in rural in rural India Ex: HUL announced its plans to triple its rural distribution reach by 2012 in its quest to generate higher sales volumes. Dabur India is focusing on improving its rural footprint and introducing special packs for consumer in these areas ? Rising Importance of smaller–sized packs ? Companies are increasingly introducing smaller stock keeping units (SKUs) at reduced price points. This helps them sustain their margins, maintain volumes from price conscious customers, expand their consumer base and help them address the needs of customers who cannot afford larger and higher priced SKUs. ? ? Ex: GCPL has launched smaller soap SKUs for Cinthol Original & Deo. About 40% of Emami overall sales come from SKUs priced at Rs less than 10, Navratna oil is available in sachets of Rs 1, Boroplus antiseptic and Fair and handsome are sold at Rs 5. To meet the one at a time customer need, Emami launched Rs 2 SKU of Zandu Balm. ? Focus on Increasing Presence in Africa: o The proximity to consumption markets within Africa as well as continents such as Europe and the openness of governments there to foreign investment is the driving force behind the increasing presence of Indian FMCG companies in Africa. o Ex: GCPL acquired Rapidol and Kinky in South Africa in 2006 and April 2008, Tura in Nigeria in April 2010 and Darling group in June 2011.
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GROWTH DRIVER
Large Market
Spending Pattern
Rise of Rural Consumer
Growt h Driver
Increasing per capita income of urban population Implement tion' GST
FDI support
? Infrastructure Development o o Improved Infrastructure facilities are expected to support the enhanced supply chain management The government of India has increased its spend on infrastructure, including the construction of roads ? Significant Increase in Consumption Level o o By 2025, India is poised to become the world’s fifth largest consuming country from the twelfth position in 2010 This will ensure the continuous growth of the FMCG industry in the future.
? Disposable Income o o According to industry estimates, household income in the top 20 boom cities is projected to grow at 10 percent annually by 2018 Further, the top 100 cities in India contribute between 50-60 percent of the overall consumption spends 24 | P a g e
? Retail Business o Real estate development in the country, such as the construction of shopping malls and hypermarkets, are up new business channels for FMCG companies ? Urbanisation o Indian cities are expected to add 379 mn people to the consumer base for FMCG companies, as the urbanisation rate is expected to increase from the current 30 – 45 percent in the next 40 years
GOVERNMENT POLICIES AND REGULATORY FRAMEWORK
? Investment Approval: Automatic investment approval up to 100 per cent foreign equity for NRI and overseas corporate bodies. These investments are allowed in food processing segments such as coffee and tea ? FDI in organized retail: India currently allows 100 per cent FDI in Cash & Carry segment and 51% in single-brand retail, which is expected to be further increased to 100%. India is also expected to allow 51% FDI in multi-brand retail, which will boost the nascent organized retail market in the country ? Priority Sector: The Government of India recognizes food processing and agro industries as priority sectors ? Relaxation of license rules: Industrial licenses are not required for almost all food and agro-processing industries, barring certain items such as beer, potable alcohol and wines, cane sugar, and hydrogenated animal fats and oils as well as items reserved for exclusive manufacturing in the small-scale sector ? Statutory Minimum Price: In October 2009, the government amended the Sugarcane Control Order, 1966, and replaced the Statutory Minimum Price (SMP) of sugarcane with Fair and Remunerative Price (FRP) and the State-Advised Price (SAP)
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SEGMENT OVERVIEW
Market Segment
10% 2% 15% 53% Tobacco 20% Food and Beverages Personal Care
FMCG
Household Care Personal Care Food & Beverages
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? The detergents segment dominates the household care segment and has been growing at an annual growth rate of 10-11% in the past five years ? Local and unorganized players account for a major share of the total volume of the detergent market ? The Household care segment is plagued by intense competition and high level of penetration. With rapid urbanization, emergence of small pack sizes and sachets is picking up
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? The Food and Beverages segment comprises of the food processing industry, health beverage industry, bread and biscuits, chocolates & confectionery, Mineral Water and ice creams ? The three largest consumed categories of packaged foods are packed tea, biscuits and soft drinks ? The Indian hot beverage market is dominated by tea and the major share of the tea market is dominated by unorganized players ? India is one of the fastest growing branded restaurants markets in the world, where the organized eating-out market is currently estimated at US$ 2 billion and growing at CAGR of 25%
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Future perfect A study conducted by Boston Consulting Group (BCG) and Confederation of Indian Industry
(CII) titled ‘The Tiger Roars’, has indicated that the Indian FMCG market size is in excess of USD 33.4 billion ( ~17% CAGR in the last 5 years). It is poised to grow 3.6 times between 2010 and 2020, faster than most other emerging markets. The consumer sector story in India remains intact and is expected to continue on a secular growth trend driven by favourable demographics, increase in per capita consumption levels and increase in penetration. The demographic factors combined with rising per capita disposable incomes are expected to fuel consumption growth in India for a long period of time.
2000
25
20 1500 15 1000 10 500 5
0
0
Source: HDFC research
Size(INR)
Growth(%)
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Favorable demographics
More than half of India's population is younger than the age of 25 years and the entry of this group into the working population over the next few decades is expected to spur India's economic growth Demographic Divided
100% 80% 60% 40% 37% 20% CY90 CY95 <15 year CY00 15-60 year 36% 34% 32% CY05 30% CY10 28% CY15 57% 57% 58% 60% 62% 63%
7%
7%
8%
8%
9%
10%
>60 year
? ? ?
In 2010, the working age population (people over 15 years old) was 1,125 mn in China. In India it was 850 mn. The median age of China’s population was 34 years, in India it was only 25 (for comparison, the median age in Europe is 43 years). In absolute terms, in 2040 there will be around 1 billion working age people in India compared with 0.9 billion in China.
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Big middleclass, increasing disposable incomes The average household income is set to rise nearly 3 times between 2010 and 2020. The income pyramid in India which typically had a wide base of ‘struggler’ households (having per capita income <USD 3,300) is quickly becoming a diamond, as household incomes of the middle income groups grow.
? Also, higher per capita disposable income and Monthly per Capita Expenditure (MPCE) creates a strong case for sustained FMCG market enlargement.
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? Rural MPCE has outpaced urban MPCE in last two Years. As rural MPCE grew by 17.5% CAGR, urban MPCE grew by 16% CAGR. This trend was visible in most consumer companies’ sales as they reported Higher rural growth vis-à-vis urban growth in past two
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Urbanization ? By 2020 the percentage of India’s population living in cities will rise to 35% from 31% in 2010. Urban dwellers not only tend to increase their purchases but also spend on more items thereby giving a boost to consumption. ? Urban population, currently at ~380mn, is expected to touch 590mn by 2030 (2.5% CAGR.
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Rural India will continue to bolster demand Rural India contributes to a third of the FMCG sector in India. Since CY08 (barring CY11) rural market has outgrown urban. Nielsen estimates that by 2025, the fast-moving consumer goods (FMCG) market in rural India will hit $100 billion and that inflation and pricing will be outstripped by consumption
India's vast "media dark" rural market over the past decade experienced significant exposure to consumer goods products due to the surge in reach of satellite television. As per the industry sources, 60% of DTH addition comes from rural India which emphasizes on ever-increasing reach of media. Thereby driving the aspirations of rural India to use products like deodorants, conditioner, etc which is not linked with income growth. There has been a gradual change in rural Indian consumers’ shopping habits. Whi le small-sized packages are vital for entry into the market, as purchasing power increases, rural consumers are increasingly buying larger packs at a lower cost per serving. Retailers who cater to these changing needs by offering a portfolio of products that provide a value proposition will be poised for growth.
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Companies are more than aware about this colossal opportunity and have single mindedly focused on expanding their reach in rural India. Companies are increasingly focusing on rural expansion with specific products and smaller SKUs. HUL has tripled its rural reach from early 2010 (a year before target). Its continued focus on rural distribution is evident from its 'Shakti Ammas/ Shaktimaans’ initiative, a network of self-help groups that distribute the company's products in remote villages (population is below 2,000). Emami initiated Project Swadesh in 2010 with an intention to increase rural coverage. The company created a new segment—rural—covering towns/villages with a population of less than 50,000 under Project Swadesh. The company adopted a hub-and-spoke model in these areas by appointing super-stockists and sub-stockists. Through Project Swadesh, in which its agents moved around villages in vehicles,Emami had reduced its dependency on wholesalers. By March 2012, the company had 160 superstockists and 4,000 sub-stockists. As a result, the direct rural reach grew substantially in 2011-12 and now contributes about 23 per cent of total sales. While the direct distribution channel, which has reach in 10,000 villages across the country, is contributing 23 per cent of the sales, the company aims to take it to 35-38% in next three years. Currently, including the direct and indirect channels, rural markets contribute about 45 per cent of total sales, which is expected to be above 50% in next 3 years. This strategy has boosted the sales of brands like Boroplus and Navratna and also the smaller brands. The company had also reached out to the rural consumers via marketing in local events like Kumbh Mela and through cultural shows like Jatras. Dabur has initiated ‘Project Double’ which is aimed at doubling the direct distribution reach in rural markets, customise trade promotions and provide focused servicing through a dedicated sales team in these markets. Thereby, the company plans to have direct access to some 27,000 villages with more than 3,000 people this fiscal. For the same, the company has identified 10 states that contribute 72% of the entire FMCG sales in the country. Under the new strategy, Dabur segmented its products into two - those operating in larger urban markets requiring exclusive category focused sales and those meant for smaller towns and rural markets requiring an integrated sales force. 36 | P a g e
GSK Consumer: Currently, rural contributes around 26-27% sales to GSK consumer. GSK Consumer has been making efforts to tap into this market with various distribution initiatives and specialized packaging in smaller SKUs (INR 5, INR 10 and INR 15). These initiatives are likely to increase contribution from rural markets. The company is targeting to reach incremental ~10,000 villages (total villages: ~50,000) in year 2012. Also, sachet (18 grams sachet which is at Rs. 5) is growing at a very significant upward of 45% growth. These initiatives will contribute incremental ~750 mn to revenues
Low penetration, low per capita consumption ? Low penetration and low per capita daily consumption offers room for further growth. This is especially true for categories like packaged food, Deodorants, Mosquito repellent, skin cream, etc indicating untapped market potential. ? Penetration gap between urban and rural market makes us more confident of existing opportunity in rural India. ? Though some categories (toothpaste, detergents, etc) have achieved high penetration, still significant growth opportunities exists by selling more to same consumer due to their lower per capita consumption.
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?
Increased disposable income, change in lifestyle, burgeoning middle class and more money in the hands of rural population can accelerate consumption and improve penetration.
Macro situation turns a tad adverse Currently macroeconomic scenario is in a tight spot as India faces a deceleration in Industrial production and GDP growth. Steep inflation and the resultant high input costs coupled with adverse currency movements and reduced employment opportunities (esp. in urban India) are some of the other challenges in the Indian market.
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?
Sustained inflation dampens consumer confidence and this is evident from Private final consumption expenditure (PFCE) growth, an official estimate of consumer spending fell to 3.98% in the June quarter over the year-ago period after growing by 4.86% in the same period the previous year
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In the worst-case scenario, the Kelkar committee said that the fiscal deficit would be 6.1% of GDP, instead of 5.1%, if corrective steps are not taken. Also, GDP estimates for FY13E have come down to sub 6 levels. S&P in April had changed the rating outlook of India from stable to negative, reflecting the possibility of a downgrade. The country's present rating is BBB-(Negative), the lowest investment grade rating, and a downgrade would result in India's rating slipping to junk status, raising the cost of overseas borrowings by domestic corporates. Inorder to avoid rating downgrade and move on the path of fiscal consolidation; there is high likelihood that government spending may be at moderate levels (this was witnessed in FY12 as well). Moderation in spending may impact consumer demand esp. in rural India (spends on NREGA down ~25% in FY12).
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Consumer confidence deteriorates As per the Consumer Confidence Survey: September 2012 conducted by RBI, for the first time the net response on perceptions about current economic conditions turned negative though sentiments about current and future economic conditions have been declining over the last four quarters. There has been a noticeable drop in the positive perceptions on household circumstances, income and price level. Also, there has been a sharp decline in Future Expectations Index.
FMCG companies are last to get impacted CNX FMCG index is trading at 100% premium to NIFTY (5-year average premium: 70%). The FMCG pack has outperformed the broader market by ~25% YTD owing to growth visibility, cleaner corporate governance, resilient demand, RM tailwinds, higher interest rates. But this is changing…
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Rate cuts to narrow the valuation gap
With imminent rate cuts, investors might switch to rate cyclical from defensives thereby narrowing premium between FMCG pack and NIFTY. ? Also, as GDP growth is expected to be sub 6% in FY12E (FY09: 6.7%), government spending is expected to mellow down due to governments focus on fiscal consolidation, consumer demand is expected to slow down (already witnessed in discretionary space) thereby impacting growth for FMCG cos
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? Major Players in FMCG Sector
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Company analysis
(GCPL Case study)
(Chapter-4)
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Incorporation Year Industry Group Main Product
2000 FMCG Home care Personal Care Hair Care
Board OF Director Chairman Managing Director Director and President Chief Strategy Officer President, International operations Executive Vice President
Mr. Adi Godrej Mr. Mahendran Ms. Nisaba Godrej Vivek Gambhir Shashank Sinha P. Ganesh
? Godrej Consumer is among the leading FMCG companies in India - second largest player in soaps and largest in hair color ? Godrej Consumer brands, which include Good knight, Cinthol, Godrej No. 1, Expert,Hit, Jet, Fairglow, Ezee, Protekt and Snuggy, among others, are household names across the country ? Major brands include Godrej Hair Dye (liquid and powder), Godrej Kesh Kala oil and Nupur hair dyes in the lower end and Renew and Coloursoft in the higher segment and give stiff competition to foreign brands in the hair colour segment ? In June 2009, GCPL completed the acquisition of 49% stake in Godrej Sara Lee Limited which had several leading brands such as Good Knight, JET, HIT, Brylcreem and KIWI ? The company employs 950 people and has three state-of-the-art manufacturing facilities at Malanpur (M.P.), Guwahati (Assam) and Baddi (H.P.)
GCPL's Current Market Share
50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Home care - HI Personal Wash Soap Hair Care - Hair Colors 9.1% 39.7% 28.7%
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Company Background
Godrej Consumer Products Limited (GCPL), the flagship company of Godrej Group earlier operated in two categories - soaps and hair colors till FY09. Post FY09, GCPL overhauled its business as per a new “3 X 3” strategy that involves having a presence in three categories across three continents. The household insecticides business (which was earlier a joint venture between another Godrej group company and Sara Lee) was merged into GCPL. GCPL manufactures and distributes personal wash, home care and hair care products in India and internationally (1/3 rd of revenues come from international operations). The company also has a strong emerging presence in markets outside India. With the acquisition of Keyline Brands in the United Kingdom, Rapidol, Kinky Group, Tura, Darling Group in Africa and Issue Group, Argencos, Cosmetica Nacional in Latin America, GCPL is best placed to benefit from presence across these emerging markets. As part of increasing its global footprint, the company has also acquired Megasari Group, a leading household care company in Indonesia.
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SWOT ANALYSIS OF GCPL
Strengths
Opportunities
• • • •
Leader among India’s FMCG companies Some brands in 100 most trusted brands Presence in more than 60 countries Widespread distribution network across India
• • •
Tap rural markets and increase penetration in urban area Mergers and acquisitions to strengthen the brand Increasing purchasing power of people thereby increasing demand
SWOT Analysis of GCPL
Weaknesses
Threats
• •
Market share is limited due to presence of other strong FMCG brands High Geography concentration stiff competition from big domestic players and international brand
• • •
Intense and increasing competition amongst other FMCG companies .FDI in retail thereby allowing international brands .Competition from unbranded and local products
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GCPL Business Hit in “HIT”
? Home insecticide is the market leader in all formats. Growing faster that category growth (since past 8 quarter). Reason for this growth is the aquition of Sara lee (South Africa). With this HI acquisition GCPL have not only diversified its business But also scaled up its domestic business. Also, Gradual switch from Coil to Electronic will bring more Profitability...and it will reduce Dependence on Low margin Soap business (From 41% in FY 10 to 22% in FY12). ? Soap Business is consistently delivering resilient growth (4QFY12:30%, 1QFY13:42: 2QFY13:24%). And Re-launch of cinthol shop would aid to the growth. ? Hair care is the only category which is not performing well but resent entry into hair cream base at highly competitive price (40% lower than competitor) has witness that it would help to gain market share of local player.
Growth Rate for GCPL
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 4% 17% 10% 10% 9% 6% 20% 29% 39% 30% 25% 18% 13% 19% 17% 32% 25% 15% 9% 11% 12% 10% 31% 25% 30% 28% 23% 24% 20% 42%
Source: GCPL
HI
Soap
Hair Colour
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GCPL to Take Synergistic Benefit
The company plans to derive synergistic benefits by taking its existing products to other geographies: Hair color to Indonesia, HI to South Africa and Argentina, and plans to launch HIT Magic Paper in India. Further, the company plans to expand in neighboring countries of Indonesia and Argentina. Recent attempts of cross pollination include: 1) Launching HI in Nigeria, 2) Bringing AER, HIT magic paper to India, 3) Launch of hair color products from LatAm business in India.
Geography Indonesia
Category Insecticides Hair Colour
Launch year FY12 NA
Opportunity Status Initially, GCPL had no presence in the coils segment, now ramping up with the Hit magic paper which has made inroads into coil consumers Evaluating various formats including powder and crème Applied for Product registration in Nigeria, pan Africa launch also planned Launched Caucasian hair colour from the Latin American business, gained 20% volume share in South Africa Already a 90% market share in ethnic hair colour in South Africa, product will be introduced pan Africa using the Darling distribution network Conducting Market Study
Africa
Insecticides Hair Colour
FY 14
FY12 Hair Colour Latin America Insecticide India Hair Colour FY13 Insecticide Air Care FY14 FY13
FY13 FY14
Crème sachet technology from Latin American business can help GCPL have a differentiated proposition for the premium hair colour market in India GCPL looking to launch the successful paper based insecticide in India to gain share Recently launched a range of air care products.
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INTERNATIONAL BUSINESS
GCPL’s international business is likely to contribute 50% of total revenue post complete acquisition of DGH (viz. FY14E). Also, in most geography, GCPL business enjoys market leadership position with immense growth opportunities. Integration of DGH and stabilization of LatAm businesses holds key for long term sustained profitability of the company.
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Domestic business has transformed into a stronger entity
GCPL’s domestic business has Double in the past Two year after merger of the Godrej Sara Lee business (home insecticides) into the company. Prior to the merger, GCPL’s revenue mix was dominated by soaps, which formed 68% of revenue in FY09. Soaps is one of the most mature categories in India with penetration levels well in excess of 90%; as a result, growth potential for the category is relatively low which led soap business to come down to 33% in FY12. After the merger of the business, the domestic revenue mix has completely transformed for the better, with home insecticides now forming 44% of domestic revenue.
(Domestic revenue mix 09 dominated by soap) (Domestic revenue mix 09 dominated by Insecticides)
Domestic Revenue mix FY09
7% 25% Hair care Soap 68% other
Domestic Revenue Mix FY12
Hair care Soap HI 11% other
12%
44%
33%
Source: GCPL
Source: GCPL
Consolidated Revenue break-up%
HomeCare HairCare Personal Wash Others
21% 41% 18% 20% FY10
14% 21% 17% 48% FY11
12% 22% 19% 47% FY12
11% 21% 22% 46% FY13E
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Balance sheet deleveraging to continue; ROEs to improve gradually.
GCPL’s debt: Equity ratio has come down from 1x in March 2011 to 0.5x in March 2012, aided by strong earnings growth and working capital reduction. There is also further scope of reduction in working capital in international business. We can also see free cash flow to deleverage the balance sheet further in spite of the upcoming payment of acquisition in Darling Group.
D/E
1.2 1 0.8 0.6 0.4 0.2 0 FY11 D/E FY12
While GCPL’s consolidated ROE has depressed in past two year from 45% to 25% in FY10 & FY12 respectively. It is the result of five big acquisitions which company have made during the past 2 year where most of investment has deploy. All acquired business is classic FMCG business which is generating high cash flow and no need for further investment. These businesses are delivering 15% to 20% growth. As a result, company’s ROE should improve gradually over the coming year.
ROE
50% 45% 40% 30% 25% 20% 10% 0% FY10 FY11 FY12 FY13 FY14 24% 36% 28% ROE
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Godrej Consumer Product vis-a-vis Indian Peer
Revenue - Comparison
INR-mn FY10 GCPL 20,412 Growth(%) Emami 10,217 Growth(%) Dabur 33,914 Growth(%) GSK Consumer 23,685 Growth(%) Marico 26,608 Growth(%) Source: GCPL, HDFC research report
FY11
36,430 78.5% 12,471 22% 41,045 21.0% 27,649 16.7% 31,350 17.8%
FY12
48,662 33.6% 14,535 17% 53,054 29.3% 31,710 14.7% 40,483 29.1%
FY13E
65,776 35.2% 17,056 17% 62,065 17.0% 36,879 16.3% 47,372 17.0%
CAGR%
34% 17% 23% 15% 23%
GCPL has reported significant high growth in its Topline growth in last couple of years, which has led it to achieve CAGR of 34% which is higher in its entire industry peer. Dabur and Marico have grown at CAGR of 23%While GCPL has shown more than double growth in the same time period. GCPL’s post FY10 Acquisition in international business has helped it to achieve such a tremendous growth. We expect GCPL to report close to 65mn in FY13E.
EBITDA Margine(%)
FY10
GCPL EBITDA Margine(%) Emami EBITDA Margine(%) Dabur EBITDA Margine(%) GSK Consumer EBITDA Margine(%) Marico EBITDA Margine(%) 4,103 20.1% 2,465 24.1% 6,300 18.6% 4,365 18.4% 3,752 14.1%
FY11
6,447 17.7% 2,534 20.3% 8,001 19.5% 5,043 18.2% 4,181 13.3%
FY12
8,776 18.0% 2,968 20.4% 8,902 16.8% 5,939 18.7% 4,844 12.0%
FY13E
17,471 26.6% 3,445 20.2% 10,482 16.9% 6,370 17.3% 6,300 13.3%
Source: GCPL, HDFC research repots GCPL’s FY13E EBITDA margins estimated 26.6% that are higher than Emami,Dabur,GSK consumer & Marico that are expected to report 20.2%,16.9%,17.3% and 13.3% respectively. GCPL has shown consistent growth in EBITDA margin while some of its Peer has decreasing trend. We further expect GCPL to command higher EBITDA than its peer in next coming year.
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9000 8000 7000 6000 5000 4000 3000 2000 1000 0 FY10 Revenue FY11 FY12 EBIDTA Profit Margin FY13 FY14 PAT Margin 2044 4866 3646 6270 20.1% 16.6% 17.7% 14.1% 18.0% 14.9% 12.0% 7810 17.30% 13.7% 19.40%
25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Barring for soaps, in the product categories of Hair Colors, Hair Extensions and Household Insecticides, GCPL enjoys leadership status. The reformulated 3x3 growth strategy has enabled the company to consolidate its product portfolio and market dominance and more than double its revenues from `1,396.6 crore in FY09 to `3,646.1 crore in FY11.We expect the company to continue to maintain this pace of growth over FY14. Accordingly, revenues are expected to reach `7,811 crore (CAGR of 28.9%) by FY14on the back of organic growth and acquisitions
Key risks The key risks to our call on GCPL are as follows: ? A major economic slowdown in any of the international markets that GCPL operates in can impact consumption growth. ? Competitors in insecticides taking price cuts to gain back market share lost to GCPL in the past 2 years. ? Any sharp devaluation in currencies that GCPL’s international business operates in will impact earnings translation.
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Income Statement
Y/E, 31st March Net Sales EBITDA EBITDA margin (%) Depreciation EBIT Other income Interest exp/ (inc) PBT PBT margin (%) Taxes Extra ord exp/ Minority Interest PAT (Reported) Less: Extraordinary Income /Others Adj PAT FY11 36,430 6,447 18% 499 5,948 698 519 6,449 18% 1,298 FY12 48,662 8,776 18% 644 8,131 520 658 9,773 20% 2,280 FY13E 62,701 10,850 17% 702 10,148 520 614 9,952 16% 2,398 FY14E 78,099 15,153 19% 774 14,379 520 614 14,141 18% 3,436 FY15E 93,324 18,106 19% 846 17,260 614 16,473 18% 4,036
5,147 331 4,883
7,267 2,002 5,728
7,554 7,554
10,705 10,705
12,437 12,437
Balance sheet Y/E, 31st March Liabilities Equity share capital Total Res. & Surplus Total Shareholders’ funds Convertible debt Others Total loans Deferred tax lia. (net) Total liabilities Assets Net fixed assets Capital WIP Total non-current assets Inv - non current Current assets Inventories Sundry debtors Cash & cash equivalents 4,394 3,840 7,839 4,725 5,187 6,189 8,507 7,844 7,857 7,876 15,373 154 30,931 0 15,464 376 40,014 0 17,048 89 42,061 0 18,388 176 44,277 0 19,884 234 46,610 0 20,054 14 37,320 16,458 111 44,720 16,458 111 50,763 16,458 111 59,327 16,459 111 69,278 324 16,928 17,252 20,054 340 27,812 28,152 16,458 340 33,854 34,195 16,458 340 42,418 42,758 16,458 340 52,368 52,708 16,459 FY11 FY12 FY13E FY14E FY15E
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Cash Short term loan &advances Other current assets Total current assets Total current liabilities Total provisions Net current assets Misc. expenditure Total assets
2,269 4,437 122 15,062 8,673 6,389 0 37,320
6,399 1,181 124 20,269 15,563 4,706 0 44,720
12,342 1,285 124 25,128 16,426 8,702 0 50,763
18,734 1,601 124 36,809 21,759 15,050 0 59,327
28,925 1,913 124 46,696 24,028 22,668 0 69,278
Cash flow Statement Y/E, 31st March Cash from operations PBT Tax paid Dep & amortization Working capital changes Others Net cash from operations Cash from investments Capital expenditure Sale/purchase of investments Net cash from investments Cash from financing Issue of shares & sh. premium Dividends paid Debt change Others Net cash from financing Net change in cash 2,542 1,631 19,685 0 20,612 (4,106) 3,616 1,461 (3,597) 882 (542) 2,934 (1,511) 1,511 0 0 (3,021) 4,433 (2,141) 2,141 0 0 (4,282) 4,250 (2,487) 2,487 1 0 (4,974) 7,704 14,999 (670) 26,760 (11,868) 0 10,248 15,410 0 2,749 2,113 0 2,989 2,343 0 3,180 2,042 13,725 10,203 11,521 15,858 499 3,605 644 (5,813) 702 (1,948) 774 (43) 846 (2,575) 5,147 7,267 7,554 10,705 12,437 FY11 FY12 FY13E FY14E FY15E
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Financial Ratios Growth Ratios %: Gross Sales Net Sales Gross Profit EBIDTA Profit EBIT Profit EBT Profit PAT Liquidity Ratios Current Ratio Quick Ratio Leverage Ratios Debt to Equity Ratio Debt Ratio Capital Employed (CE)/ Net worth Ratio Interest Coverage ratio Activity Ratio/ Turnover Ratio Debtor turnover (x) Avg. Collection Period (Days) Creditor Turnover(x) Avg. credit period (Days) Inventory Turnover (x) Avg. Inventory Period (Days) Asset Turnover Fixed Asset Turnover Total Asset Turnover Profitability Ratios % Gross Profit Margins EBIDTA Profit Margin EBIT Margin EBT Margin PAT Margin ROE = (PAT-Pref Dividend)/ Avg. Networth
FY11
FY12
FY13E
FY14E
FY15E
79% 78% 73% 57% 54% 54% 54%
34% 33% 34% 36% 37% 37% 52%
29% 29% 26% 24% 25% 25% 2%
25% 25% 28% 40% 42% 42% 42%
19% 19% 20% 19% 20% 20% 16%
1.74 1.23
1.30 0.80
1.53 1.21
1.69 1.30
1.94 1.62
1.16 0.54 2.16 11.46 9.49 38.47 3.34 109.14 4.19 87.20 2.37 0.79 52.04% 17.68% 16.31% 17.69% 14.12%
0.58 0.37 1.59 12.35 10.30 35.44 3.56 102.49 3.50 104.31 12.33 0.81 52.35% 18.03% 16.71% 20.08% 14.93%
0.48 0.32 1.48 16.52 10.13 36.03 4.69 77.78 5.88 62.11 3.68 0.93 51.38% 17.30% 16.18% 15.87% 12.05%
0.38 0.28 1.39 23.41 9.96 36.66 3.81 95.81 4.34 84.06 4.25 0.96 52.70% 19.40% 18.41% 18.11% 13.71%
0.31 0.24 1.31 28.11 11.85 30.81 4.58 79.74 5.61 65.04 4.69 1.00 52.75% 19.40% 18.49% 17.65% 13.33%
36%
25%
24%
28%
26%
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? Industry Snapshot
Company Name Dabur Emami GSK Consumer Godrej Consumer Marico
P/E(x) FY12 FY13E FY12 34.9 29.5 32.9 29.5 36.2 31.1 47.2 35.3 42.7 34.2
P/S(x) FY13E 4.3 6.1 4.8 5.4 3.5
P/BV(x) EV/EBITDTA(x) EV/Sales(x) OPM % ROE % ROCE % EPS GROwTH %Sales Growth % FY12 FY13E FY12 FY13E FY12 FY13E FY13E FY13E FY13E FY13E FY13E 3.6 13.0 10.3 25.3 21.3 4.3 3.6 15.0 39.3 28.6 18.5 17.0 5.1 12.9 11.5 30.0 25.4 6.1 5.1 18.9 41.3 38.3 11.6 17.3 4.1 11.5 9.6 24.6 20.9 4.8 4.1 17.6 34.5 42.9 16.3 16.3 4.2 8.8 7.7 30.5 23.9 5.4 4.2 16.3 21.3 20.0 20.7 31.1 2.9 11.9 9.3 28.8 22.0 3.5 2.9 11.5 30.5 30.3 25.0 18.2
Recommendation We initiate coverage on Godrej Consumer Products Ltd (GCPL) as a BUY with a Price Objective of `883 (target 20x FY14 EPS) over a period of 21-24 months representing a potential upside of ~23%. At CMP of `728, the stock is trading at 18.1x and 15.1x its estimated earnings for FY13 and FY14, respectively. Driven by global acquisitions of Darling Group (Africa) & Cosmetica Nacional (Latin America) and strong growth of the Indian household insecticides business, we expect GCPL’s consolidated revenues to grow at 34.4% CAGR over the forecasted period FY12-FY14. In our opinion, our estimates are conservative and we expect a substantial re-rating of the price earnings (PE) multiple. Currently, the discount to peers is a mispricing which should narrow as the acquisitions start delivering.
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Conclusion:
As per Analysis, we can say that FMCG has tremendous growth rate with relevant other Growing sector. Over the longer term, the Indian consumer sector will ride several external/internal opportunities: favorable demographics, burgeoning middle class, increase in per capita income, urbanization, lower penetration levels, low per capita consumption and increase in distribution reach. Also, the land and gold driven wealth effect in rural India will keep rural demand unscathed. Steady drumbeat of negative news (sustained inflation, GDP slowdown, weak rupee, reduction in disposable income and consumers’ perception about their economic situation turning negative) threatens FMCG valuations. The FMCG pack is trading at a 20% premium to its 5 yr mean valuation (100% premium to NIFTY) and therefore looks vulnerable to us in near term. Also, with imminent rate cuts, investors might switch to rate cyclical from defensives.
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WEBLIOGRAPHY
1. www.moneycontrol.com 2. http://www.researchbytes.com 3. www.godrejcp.com 4. en.wikipedia.org/wiki/Economy_of_India 5. www.equitymaster.com/
BIBLIOGRAPTHY
1. C. Viswanatha Reddy and J Viswa Pavani (2012) Intrinsic Value Estimation Through Fundamental AnalysisIndian Journal of Finance ,Volume 6, Number 2, February 2012 49-57 2. Dyna Seng Jason. R Hancock (2012) Fundamental Analysis and the Prediction of Earnings, International Journal of Business and Management, Volume 7, No.3, February 2012 32-46 3. Venkatesh C.K. and Madhu Tyagi (2011) The Use of Fundamental and Technical Analysis by Stock Exchange Dealers: Indian Evidence, Middle Eastern Finance and Economics, Issue 14 (2011) 73-82. 4. Venkatesh C.K., Madhu Tyagi and Ganesh (2012) Fundamental Analysis And Its Usage In Indian Capital Markets: A Survey, Bangladesh Research Publications Journal, Volume 7, Issue 1 ,(2012) 46-54
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doc_702980308.pdf