Profitability Analysis of FMCG Sector of India

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1 Volume-03 Issue-10 October-2018 ISSN: (Online) [UGC Listed Journal] Profitability Analysis of FMCG Sector of India Dr. Hiral Desai Assistant Professor, Dolat-Usha Institute of Applied Sciences and Dhiru-Sarla Institute of Management & Commerce, Valsad, Gujarat (India) ARTICLE DETAILS Article History Published Online: 10 October 2018 Keywords FMCG Sector, Profitability Aspect, Weighted Mean, Composite Ratio, Trend Analysis, Mann Kendall * Corresponding Author hiralrdesai79[at]gmail.com ABSTRACT In this research paper attempt have been made to analyses the profitability aspect of FMCG Sector of India for the period of 10 years by taking a sample of 16 companies listed on BSE or NSE. The financial data have been collected for the period of 10 years from to of 16 companies and found out 4 profitability ratios-net Profit Margin Ratio, EBIT Margin Ratio, Return on Capital Employed and Return on Equity. From all these ratios researcher have worked out composite ratios by using paid-up share capital as weight and found out weighted mean of these ratios for 10 years. The researcher has used ratio analysis and various statistical techniques such as Average, Coefficient of correlation, Coefficient of Determination, Trend Analysis and Mann Kendal test. The study reveals that there is efficient and profitable utilization of capital invested into the business in the FMCG sector of India. The ROE ratio is satisfactory from the viewpoint of Equity shareholders as far as return on their investment is concerned. 1. Introduction Fast-moving consumer goods (FMCG) are products that are sold quickly and at relatively low cost. FMCG include nondurable goods such as soft drinks, toiletries, OTC drugs and many other consumables. FMCG have a short life, either as a result of high consumer demand or because the product deteriorates rapidly. FMCGs includes meat, fruits and vegetables, dairy products, and baked goods as well as alcohol, toiletries, pre-packaged foods, soft drinks, chocolate, candies, and cleaning products. 2. Indian scenario of FMCG sector The FMCG segment is the fourth largest sector in the Indian economy. The market size of FMCG in India is estimated to grow from US$ 31.6 billion in 2011 to US$ billion in At present the FMCG Sector is worth US$ 13.1 billion. FMCG Sector in India include segments like cosmetics, toiletries, glassware, batteries, bulbs, pharmaceuticals, packaged food products, white goods, house care products, plastic goods, consumer non-durables, etc. The FMCG market is highly concentrated in the urban areas. The reason behind this is the rise in the income of the middle-income group and it is one of the major reason for the growth of the Indian FMCG market. There is increase in demand for Ayurved products so we can see significant growth of Patanjali Ayurveda with a revenue of US $ 1.57 billion in Literature Review Anna Bieniasz (2011) have selected food sector enterprises of the European Union of selected Euro zone countries & food industry enterprises of Poland for a period from 2005 to The experts have used Ratio Analysis and various statistical tools like Regression Analysis, mean, Coefficient of Variance, etc.the study concluded that in case of large sized enterprises and the small and middle sized enterprises, the profitability was negatively correlated with the cycles of inventory, accounts receivables and current liabilitie. This resulted into decrease in the profitability. Usama (2012) has selected the 18 companies listed on the Karachi Stock Exchange from other food sector and the data has selected from He has taken various ratios such as Average collection period, average payment period, inventory turnover in days, cash conversion cycle, debt ratio, financial asset to total asset ratio, current ratio and net operating profitability for examining the effect of different variables of working capital management as well as used Regression Analysis. The study concluded that the size of the firm and financial asset to total asset ratio have significant positive effects on firms profitability while average collection period has a significant negative effect on firm s profitability. Goel (2012) has selected 5 well known FMCG companies - HUL, Dabur India, Godrej Consumer, Marico and Colgate Palmolive for a period from 2006 to The main objective of the study is to measure the relative liquidity and solvency level in selected companies. The researcher has used financial ratio as well as various statistical tools such as Correlation, Regression Analysis and ANOVA to assess the short term and long term performance of the selected units. The study found that there is no relationship between liquidity and solvency as well as it is also found that increased profitability from decreased solvency can be offset by increased solvency. Khamrui (2012) has conducted the study of two major FMCG players namely ITC & HUL. The researchers have done the comparison between the various profitability ratios (as independent variable) and Return on Investment (ROI) as the dependent variable. The study revealed that both the companies in terms of profitability & liquidity position have a significant impact on profitability. Descriptive statistics disclose that liquidity position has significant impact on profitability. Multiple regression tests confirm a higher degree of association between the liquidity and profitability. 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2 Volume-03, Issue-10, October-2018 Khamrui B.B. (2012) has conducted the study of two well knowncompanies - Britannia Industries &Dabur India for a period of ten years from to The researchers have used various accounting ratios such as NPM, CTR, ROI, and ROSE for analyzing profitability as well as various liquidity ratios such as Current Ratio, Quick Ratio, SQR, and DER to assess liquidity position of selected companies. The study revealed that the influence of CTR is more than that of NPM on ROI in both the companies except in year in Britannia Industry which indicate better short term and long term liquidity position of the firm. In case of Britania Industries, a sudden fall in NPM & ROI indicates tough times for the company. Dabur India continued to drive on its growth path even during the period of global economic recession. Bhaskar Bagchie, J. C. (2012)has conducted the study of 10 FMCG companies. They have empirically investigated the effect of working capital management on firm s profitability as measured by return on total assets and return on investment. They have employed two models of panel data regression analysis-fixed effect LSDV and pooled OLS model. The study revealed that the better explanatory power of the fixed effects LSDV modelthan that of the pooled OLS model. The study also concluded that DTA, AD, AC and AI are negatively associated with firm s profitability as quantified by ROTA. The study also revealed that when they have assets the impact of all explanatory variables on ROI, CCC, DTA and AC are negatively associated with ROI. 4. Research Methodology 4.1 Research Statement Profitability Analysis of FMCG Sector of India. 4.2 About the research problem The present study emphasis on the Profitability aspect of FMCG Sector of the India for a period from to One of the significant factors affecting the functioning of an industrial unit is the size of that unit. So far as financial analysis is concerned, one of the most important parameters of judging the size of a industrial unit is the paid up share capital of that unit. Researcher have tried to innovate in analyzing the ratios by combining them with the paid-up capital, at respective point of time and working out composite ratios for ten years duration for the companies. Then such composite ratios have been used in carrying out trend analysis and comparative analysis through various tests of hypothesis. 4.3 Research Design The present study entitled Profitability Analysis of FMCG Sector of India is an analytical, conclusion oriented and hypothesis testing type of research study. 4.4 Objectives of the study To analyze and evaluate the profitability aspect of selected companies in particular and the FMCG sector in general. To make suggestions/comments about the functioning and development of FMCG sector of India. 4.5 Nature and Sources of Data The present study is mainly based on secondary data. These data has been collected from annual reports of the selected companies from ACE Equity software. Other information has been collected from research publications, consultants reports, other periodicals, journals, and websites of respective companies and other various documents of the companies. 4.6 Period of Study The present study covers the period of 10years from the year to Sample Design The sample has been selected by two stage sampling method. For selecting the first stage sample, convenient sampling method is used, whereas for selecting the second stage sample proportional stratified sampling is used. 4.8 Population: The population consists of all the FMCG companies in India. 4.9 Sampling Units and Sample Size FMCG companies working in India are the sampling units for drawing the first stage sample, where as the companies listed on BSE or NSE or both are considered as the sampling units for drawing the second stage sample. For convenience, the size of the first stage sample is fixed at 76.Out of 76 total numbers of companies, researcher has selected 16 companies in a sample on the basis of average paid up share capital, classified all the units of population on the basis of size of the company. CLASSIFICATION OF COMPANIES BASED ON DIFFERENT SIZES Size of the company (On the basis of Average Paid up capital) Indian Rupees in Crores (Stratum) No. of companies (Size of Strata) No. of units to be selected from the Stratum Small-cap (Less than 5 Crores) 24 5 Mid-cap (5 Crores or more but less than 30 Crores) 39 8 Large-cap (30 Crores or more) 13 3 Total LIST OF SELECTED COMPANIES Sr. Average Paid Up Share Capital Name of the company no (Indian Rupees in Crores) 1 Hindustan Unilever Ltd Colgate Palmolive (India) Ltd Himalya International Ltd Godrej Consumer Products Ltd RRIJM 2015, All Rights Reserved 139 Page

3 Volume-03, Issue-10, October Britannia Industries Ltd Lotus Chocolate Company Ltd Modern Dairies MFL India Ltd Emami Ltd Hind Industries Ltd Vadilal Industries Milk Food Ltd Paramount Cosmetics (India) Ltd Madhur Industries Ltd Hipolin Ltd Pee CeeCosmaSope Ltd Tools And Techniques Accounting Technique: 1. Ratio analysis Statistical Technique: 1. Average (Mean X ) 2. Coefficient of correlation (r) 3. Coefficient of Determination (R 2 ) 4. Trend Analysis 5.Mann Kendall Test 5. Profitability Ratio Profitability ratios are a set of measurements used to determine theability of a business to create earnings. These ratios are considered to be favourable when they improve over a trend line or are comparatively better than the results of competitors. 5.1 Net profit margin ratios or profit after tax margin ratio The Composite Net Profit Margin Ratios of the sector from that of Net Profit Margin Ratios of the companies are obtained for ten year period under study. Table No: 5.1 Composite PAT Margin Ratio [Note: Table is given in Appendix at the end of the paper] Chart No: 5.1 The trend curve/line for the PAT Margin ratios for the sector To test the following H0 related to goodness of fit, the Mann-Kendall test is applied totest the following hypothesis. H0: There is no trend in the series of the Composite PAT Margin Ratio of the sector. H1: There is some trend in the series of the Composite PAT Margin Ratio ofthe sector. Here, from the above chart we can clearly say that there is no trend in PAT Margin. We checked significance of PAT Margin using Mann-Kendall test and found that Mann Kendall Statistic is 7 with p-value 0.282, which is greater than the predefined significant level α=0.05. So we can say that there is no significance trend in PAT Margin. And we cannot fit any model on it. Conclusion: From the above table no. and chart no.5.1, we can say that there is no trend in the PAT Margin of FMCG Sector of India. The PAT Margin Ratio for the sector for 10 year period, to , is The highest ratio of % is found in the year Trend analysis of EBIT margin ratios of FMCG sector The Composite EBIT Margin Ratios of the sector from that of EBIT Margin Ratios of the companies are obtained for ten year period under study. RRIJM 2015, All Rights Reserved 140 Page

4 Volume-03, Issue-10, October-2018 Table No: 5.2 Composite EBIT Margin Ratio [Note: Table is given in Appendix at the end of the paper] Chart No: 5.2 The trend curve/line for the EBIT Margin ratios for the sector To test the following H0 related to goodness of fit, the Mann-Kendall test is applied totest the following hypothesis. H0: There is no trend in the series of the Composite EBIT Margin Ratio of the sector. H1: There is some trend in the series of the Composite EBIT Margin Ratio ofthe sector. Here, from the above chart we can clearly say that there is no trend in EBIT Margin. We checked significance of EBIT Margin using Mann-Kendall test and found that Mann Kendall Statistic is 17 with p-value 0.071, which is greater than the predefined significant level α=0.05. So we can say that there is no significance trend in EBIT Margin. And we cannot fit any model on it. Conclusion: From the above table no. and chart no.5.2, we can conclude that there is no trend in EBIT Margin ratio of FMCG Sector of India. It may be noted that the highest EBIT Margin ratio (16.65%) for the FMCG Sector was during the year and the lowest one (11.77%) was during the year Trend analysis of return on capital employed (ROCE) of FMCG sector The Composite EBIT Margin Ratios of the sector from that of EBIT Margin Ratios of the companies are obtained for the ten year period under study. Table No: 5.3 Composite ROCE Ratio [Note: Table is given in Appendix at the end of the paper] Table No : 5.3 Composite and Estimated ROCE Ratio Year Composite ROCERatio(%) Estimated ROCE Ratio(%) RRIJM 2015, All Rights Reserved 141 Page

5 Volume-03, Issue-10, October-2018 Chart No: 5.3 The trend curve/line for the Return on Capital Employed ratios for the sector To test the following H0 related to goodness of fit, the Mann-Kendall test is applied totest the following hypothesis. H0: There is no trend in the series of Composite Return on Capital Employed Ratio of the sector. H1: There is some trend in the series of Composite Return on Capital Employed Ratio ofthe sector. Here, from the above chart we can clearly say that there is a positive trend in ROCE. We checked significance of ROCE using Mann-Kendall test and found that Mann Kendall Statistic is 23 with p-value 0.021, which is less than the predefined significant level α=0.05. So we can say that there is a significant positive trend in ROCE. And we can fit any model on it.from the above chart and Mann Kendall Statistics we detect that there is an upward trend. We fitted linear regression line the R 2 value is , and p-value is , from which we can say that the linear model is significant for ROCE. Conclusion: From the above table no. and chart no.5.3, we can conclude that there is a upward trend in ROCE of FMCG Sector of India. It may be noted that the highest ROCE (94.62%) for the FMCG Sector was during the year and the lowest (49.50%) one was during the year The sector has maintained the ROCE at an average rate of 69.72% during the study period. 5.4 Trend analysis of return on equity of FMCG sector The Composite Return on Equity Ratios of the sector from that of Return on Equity Ratios of the companies are obtained for ten year period under study. Table No: 5.4 [Note: Table is given in Appendix at the end of the paper] Chart No: 5.4 The trend curve/line for the Return on Equity ratios for the sector To test the following H0 related to goodness of fit, the Mann-Kendall test is applied totest the following hypothesis. H0: There is no trend in the series of Composite Return on Equity Ratio of the sector. H1: There is some trend in the series of Composite Return on Equity Ratio ofthe sector. Here, from the above chart we can clearly say that there is no trend in ROE. We checked significance of ROE using Mann- Kendall test and found that Mann Kendall Statistic is 11 with p- RRIJM 2015, All Rights Reserved 142 Page

6 Volume-03, Issue-10, October-2018 value 0.177, which is greater than the predefined significant level α=0.05. So we can say that there is no significance trend in ROE. And we cannot fit any model on it. Conclusion: From the above table no. and chart no.5.4, we can find that there is no trend in ROE of FMCG Sector in India. The sector has maintained the ROE at an average rate of 58.42% during the study period.in the year , it was highest (84.52%) which shows that the position is very satisfactory from the viewpoint of Equity shareholders as far as return on their investment is concerned. 6. Findings References From the above study, we can find that the PAT Margin Ratio for the sector for 10 year period from to , is In the beginning of the two years EBIT Margin Ratio has increased, but during the period from to , it has remained around 11%. From onwards, it has started increasing and it reached to 16.65% in the year In the year , it was 49.50% and was reached to 89.17% at the end of the decade. The sector has maintained the ROCE at an average rate of 69.72% during the decade. So, there is efficient and profitable utilization of capital invested into the business in the FMCG sector of India. The ROE ratio is positive in all the years of the study period. This position is very satisfactory from the viewpoint of Equity shareholders as far as return on their investment is concerned. 1. Arora, M. N. (2012). A Text Book of Cost And Management Accounting (10th Edition ed.). New Delhi: Vikas Publishing House Pvt Ltd. 2. C.R.Kothari. (2004). Research Methodology Methods and Techniques. (2nd Edition Ed.) New Age International Publishers. 3. Chandra, P. (2007). Financial Management Theory and Practice (6 ed.). Tata Mc-Graw Hill.pp D.C.Sancheti, V. (2012). Statistics (Theory, Methods & Application) (Seventh Revised Edition ed.). Sultan Chand & Sons.pp.5.2, 6.2, 6.3, 8.2, 9.2, 10.2, 11.2, Dr.PritiR.Majhi, D. K. (2013). Research Methodology (Concepts, Methods, Techniques ans SPSS) (2nd Edition ed.). Himalaya Publishing House. 6. Dr. S. P. Gupta and Dr. M. P. Gupta, Business Statistics, (Sultan Chand & Sons Educational Publisher, New Delhi) Ed. 2005, p , Dr. S. P. Gupta and Dr. M. P. Gupta, Op.cit., p Kumuda P.R., M. L. (Spring 2010). Financial & Management Accounting. Manipal: Manipal Global Education Services. 9. Nirmal Gupta, C. S. (2009). Corporate Accounting (Theory And Practice ) (2nd Edition ed.). New Delhi: Ane Books Pvt. Ltd.pp P.C.Mittal, S. (2008). Business Research Methods and Techniques (1st Edition ed.). Vayu Education of India. 11. Pandey, I. M. (2004). Financial Management (Ninth Edition ed.). New Delhi: Vikas Publishing House. 12. R.S.N. Pillai, B. S. (2011). Fundamentals of Advanced Accounting. New Delhi: S.chand& company Ltd. 13. S.C.Gupta, V. Fundamentals of Mathematical Statistics. (Sixth Revised Edition ed). Sultan Chand & Sons.pp , S.C.Gupta. (2004). Fundamentals of Statistics (Sixth Revised Edition ed.). (M. Gupta, Ed.) Himalaya Publishing House.pp , U.K.Shrivastava, G. S. Quantitative Techniques for Managerial Decisions.W.A. Denial, Applied Nonparametric tests. 16. Anna Bieniasz, Z. G. (2011). The Influence of Working Capital Management on the Food Industry Enterprises Profitability. Contemporaroy Economics, 5 (4), BhaskarBagchie, J. C. (2012). Influence of Working Capital Management on Profitability: A Study on Indian FMCG Companies. International Journal of Business & Management, 7 (22), Goel, S. (2012). Modelling Correlated Liquidity & Solvency on a Balancing Equation in Indian Consumer Industry. Journal of Applied Research in Finance, 4 (2(8)), Khamrui, B. B. (2012). Financial Performance of FMCG Companies in India: A Comparative Study between Britannia Industries &Dabur India. International Journal of Business, Economics & Management Research, 2, Khamrui, B. B. (2012). Profitability & Liquidity Management of FMCG comapanies in India. International Journal of Research in Commerce & Management, 3, Usama, M. (2012). Working Capital Management and its Effect on Firm's Profitability and Liquidity: In Other Food Sector of Karachi Stock Exchange. Arabian Journal of Business & Management Review, 1 (12), Abbreviation: 1. AC Age of Creditors 2. AD Age of Debtors 3. AI Age of Inventory 4. CCC Cash Conversion Cycle 5. CTR Capital Turnover Ratio 6. DER Debt Equity Ratio 7. DTA Debt to Total Assets 8. EBIT Earning Before Interest and Tax 9. FMCG Fast Moving Consumer Goods 10. NPM Net Profit Margin 11. ROCE Return on Capital Employed 12. ROE Return on Equity 13. ROSE Return on Sweat Equity 14. ROTA Return on Total Assets RRIJM 2015, All Rights Reserved 143 Page

7 Volume-03, Issue-10, October-2018 APPENDIX TABLES Table No: 5.1 Composite PAT Margin Ratio Composite PAT Margin Ratio based on Weighted Mean where Wi are paid up capital and Ri are PAT Margin Ratio Name of the Companies Year Wi WiRi R Hindustan Unilever Ltd Colgate Palmolive (India) Ltd Himalya International Ltd Godrej Consumer Products Ltd Britannia Industries Ltd Lotus Chocolate Company Ltd Modern Dairies Ltd MFL India Ltd Emami Ltd Hind Industries Ltd Vadilal Industries Milk Food Paramount Cosmetics (India ) Ltd Madhur Industries Ltd Hipoline Ltd Pee CeeCosmaSope Ltd SumWi Sum WiRi R RRIJM 2015, All Rights Reserved 144 Page

8 Volume-03, Issue-10, October-2018 Table No: 5.2 Composite EBIT Margin Ratio Composite EBIT Margin Ratio based on weighted Mean where weight (Wi) are paid up capital and Ri are EBIT Margin Ratio Name of the Companies Year Sum Wi Sum WiRi R Hindustan Unilever Ltd Colgate Palmolive (India) Ltd Himalya International Ltd Godrej Consumer Products Ltd Britannia Industries Ltd Lotus Chocolate Company Ltd Modern Dairies Ltd MFL India Ltd Emami Ltd Hind Industries Ltd Vadilal Industries Milk Food Paramount Cosmetics (India ) Ltd Madhur Industries Ltd Hipoline Ltd Pee CeeCosmaSope Ltd SumWi Sum WiRi R RRIJM 2015, All Rights Reserved 145 Page

9 Volume-03, Issue-10, October-2018 Table No: 5.3 Composite ROCE Ratio Composite ROCE Ratio based on weighted Mean where weight (Wi) are paid up capital and Ri are ROCE Ratio Name of the Companies Year Sum Wi Sum WiRi R Hindustan Unilever Ltd Colgate Palmolive (India) Ltd Himalya International Ltd Godrej Consumer Products Ltd Britannia Industries Ltd Lotus Chocolate Company Ltd Modern Dairies Ltd MFL India Ltd Emami Ltd Hind Industries Ltd Vadilal Industries Milk Food Paramount Cosmetics (India ) Ltd Madhur Industries Ltd Hipoline Ltd Pee CeeCosmaSope Ltd SumWi Sum WiRi R RRIJM 2015, All Rights Reserved 146 Page

10 Volume-03, Issue-10, October-2018 Table No: 5.4 Composite ROE Ratio Composite ROE Ratio based on weighted Mean where weight (Wi) are paid up capital and Ri are ROE Ratio Name of the Companies Year Sum Wi Sum WiRi R Hindustan Unilever Ltd Colgate Palmolive (India) Ltd Himalya International Ltd Godrej Consumer Products Ltd Britannia Industries Ltd Lotus Chocolate Company Ltd Modern Dairies Ltd MFL India Ltd Emami Ltd Hind Industries Ltd Vadilal Industries Milk Food Paramount Cosmetics (India ) Ltd Madhur Industries Ltd Hipoline Ltd Pee CeeCosmaSope Ltd SumWi Sum WiRi R RRIJM 2015, All Rights Reserved 147 Page