Anda di halaman 1dari 10


Working Capital management at FMCG


In 2010 Hindustan Lever Limited (HUL) generated funds from internal

sources, i.e. its operations. The case deals with how HUL creates competitive advantage for itself with shorter working capital cycle. The main emphasis is on lean inventory management, fast and efficient collection immensely supported by prolonged payment period. Students are asked to make inter firm comparisons and comment on overall working capital management of each firm.

Learning Objective:

To introduce issues in overall working capital management. To

explore a range of issues in working capital management with a primary focus on accounts receivable, inventory and payables. Students are advised to compute gross operating cycle and net operating cycle. With help of data given for three firms students need to compute and compare the operating cycle and hence efficiency of the three firms with respect to working capital.

Subjects Covered: Financial Management, Working Capital management

This case was written by Prof. Garima Sisodia, IBS Hyderabad, and is intended to be used as the basis for class room discussion rather than to illustrate either effective or ineffective handling of a management situation. Suggestions are welcome at

Working Capital management at FMCG

Liquidity for the ongoing firm is not really dependent on the liquidation value of its assets but rather on the operating cash flow generated by those assets. (Soenen, 1993) Working capital starvation is generally credited as a major cause if not the major cause of small business failure in many developed and developing countries. (Rafuse, 1996)

Introduction: Unilever products touch the lives of over 2 billion people every day. Every two out of three Indians use Hindustan Unilever products. HUL is a subsidiary of Unilever, one of the worlds leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of about 44 billion in 2011. Unilever has about 52% shareholding in HUL. 2008 brought with it economic slowdown. Stock market plunged, purchasing power declined and funds became scare. Shortage of funds coupled with falling demand in the market forced firms to search other sources of funds. Conventional managers look up to Profit and Loss account as source of funds, whereas smart managers found funds lying idle in balance sheet, in the form of working capital. Many companies underestimate the importance of working capital management as a lever for freeing up cash from inventory, accounts receivable, and accounts payable. HUL by effectively managing these components sharply reduced its dependence on outside funding and can use the released cash for further investments or acquisitions. This leads to financial flexibility, creates value and has a strong impact on a companys enterprise value by reducing capital employed and thus increasing asset productivity. Company Background: Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company with a heritage of over 75 years in India. It has product portfolio of over 35 brands spanning 20 distinct categories. It started in 1888. In initial years it gave India products like Lifebouy, Pearls , Lux ,Vim and Vanaspati. Company grew through both organic and inorganic routes. It acquired companies like Brook Bond(1984) , Lipton(1972), Ponds (1974) and Tata Oils Mills Company (TOMCO) (1993). In 1996, HUL and yet another Tata

company, Lakme Limited, formed a 50:50 joint venture, Lakme Unilever Limited, subsequently in 1998, Lakme Limited sold its brands to HUL and divested its 50% stake in the joint venture to the company. It later acquired Kothari General Foods(1992), Kissan(1993) and Dollops Icecream. In 1994, Brooke Bond India and Lipton India merged to form Brooke Bond Lipton India Limited (BBLIL). It introduced Walls range of frozen foods and Purit, water purifier. In 2007, the Company name was formally changed to Hindustan Unilever Limited after receiving the approval of share holders during the 74th AGM on 18 May 2007. On 17th October 2008 , HUL completed 75 years of corporate existence in India. Industry and Competitors: The FMCG sector can be divided into two segments- the premium urban upper class and the rural class. The growth of consumerism in rural class has shifted the focus for the firms from urban to rural India. At present, urban India accounts for 66% of total FMCG consumption, with rural India accounts for the remaining 34%. However, rural India accounts for more than 40% of the consumption in major FMCG categories such as personal care, fabric care and hot beverages. The industry is volume driven and is characterised by low margins. The products are branded and backed by marketing, heavy advertising, slick packaging and strong distribution networks. Also, raw material prices play an important role in determining the pricing of the final product. (Refer Annexure-I) The Crisis of Declining Markets Most of the companies had faced competitive pressure during 2009. The companies had to take judicious price increases and also reduced the packet sizes and stock-keeping units (SKUs). Hence the growth seen by FMCG companies was almost entirely volume led. Concerns remain with respect to the increasing competitive environment, input cost pressures and infrastructure bottlenecks. Companies, which have the ability to maintain and increase the market share, offset cost pressures without sacrificing volumes would stand to benefit.

Exhibit-I-Speech M. S. Banga, Chairman~2000-2005 Through the nineties, the FMCG markets grew at almost 15% per annum in value. Suddenly, in 2000, FMCG market growth stalled and then declined for the next four years. It is important to understand why this happened. The rapid opening up of the economy resulted in many new avenues of expenditure for the consumers growing income. A sharp drop in interest rates from 18% to 8% led to explosive demand for consumer durables like white goods, two-wheelers and automobiles. After all, one could drive out of a car showroom in a Maruti 800 with a down payment of only Rs. 2000! The home ownership market grew exponentially as the average age of a home loan borrower dropped from 50 in 1999 to 30 in 2004. Mobile phone ownership and usage exploded due to its amazing lifestyle and convenience benefits as well as lower prices. Entertainment, Leisure and Travel sectors also boomed. The lure of new avenues of expenditure in products and services led to consumers restricting their spends on FMCG. It is not that they bathed less often or brushed their teeth less often or indeed washed their clothes less often. But they did downtrade to lower priced substitutes from higher quality brands. For example, a consumer buying six tablets of Lux in a month went to buying three of Lux and three cheaper brands. Or a consumer buying Surf Excel for her clothes mixed it with a cheaper powder. As a result of this shift in spending patterns, the FMCG market declined in value in the last four years creating a major challenge for growth. Source:, HUL 75 years Special Issue

Working Capital Management: Easy to understand, Difficult to apply: Imagine for a while of input market perfect to such an extent that any amount of raw material is available at any time at a fixed price. Further in a very short span of time the input is converted into finished goods, which are instantaneously sold for cash. In such situation there would not be any need of working capital management. Returning to reality we find that fluctuating input market forces firm to keep safety stocks, production involves considerable time generating pile of work in progress at any given point of time, market does not absorb output as and when made leading to accumulation of stocks in godowns. Because of competition many firms sell their output on credit basis generating accounts receivables. Thus the non- ideal input and output market (Bhattacharya, 1987) at every stage of procurement, production and selling creates certain current assets namely; raw material, work in progress, finished goods and accounts receivables. These current assets leads to blockage of funds which otherwise can be utilized for working expense. Working capital is the funds required to finance the working expenses (Bhattacharya, 1987). Working capital has to be managed on a continuous basis and immediate funds need to be generated for smooth functioning of the firm. For a finance manager it is the funds locked up in current assets and

therefore he finds liquidity support in net working capital. For a production manager, liquidity is synonymous with uninterrupted supply of material inputs to his production lines. Similarly for a marketing manager, if there is no production, his marketing outlets dry up despite demand in the market. While the finance manager discourages overstocking of materials, the production manager and the marketing manager avoid the situation of being out of stock. In this conflict the goal of the organisation often takes a back seat.

Physical Supply Chain and Financial Supply Chain: Working capital is also closely related to two other, more fashionable notions; the physical and financial supply chains. The physical supply chain represents business processes that make products, materials and services, flowing from supplier to customer whereas the financial supply chain represents business processes defining the cash flowing from customer to supplier. Operating Cycle and its components: Operating cycle is the time lag between expenditure for purchase of raw material and collection cash on sales of finished goods. It views working capital management in the context of going concern approach unlike liquidity ratios that measures working capital management in gone concern approach context (Bhattacharya, 1987). Working Capital Management in India: Working capital cycle plays a vital role in business productivity. It is a measure of the company's efficiency in managing its operational costs. However, every industry has its own set of dynamics that influences its working capital cycle. (Refer Annexure-III) India Inc. has been pursuing cost cutting measures with more seriousness now than ever before. As a result foreign concepts like JIT (Just In Time inventory management), BPR (Business Process Re-engineering) have entered the Indian corporate domain. Debtors and inventory days are unavoidable features of any sector. However the importance of these parameters and the fact that they are very much dependent on the nature of industry, a particular company operates in as well as the relative standing (leader or laggard) of the company in the industry. Before we analyse India Inc. based on debtor and inventory days, we shall first look at the relevance of the two in the operations of any company.

HUL, Dabur and Marico: Who manages Working Capital most efficiently? Comparing companies across the FMCG sector is a difficult task as apart from core business, the working capital efficiency will depend a lot on other factors. But a quick estimate of operating cycle and its component can tell us about the working capital efficiency of each one of them. Assume 80% of the sales and purchases of all three companies are on credit basis. The data required for calculation has been provided in the Annexure-III & IV. Assignment questions: 1. What is working capital management? What happens if different components of working capital management are more or less than the optimal levels? 2. Define Operating cycle and its components. 3. Has HUL gained advantage over its competitors in terms of working capital management ? If so in which aspects ? 4. What are the reasons for better or worse performance of HUL over its competitors in terms of working capital management ? 5. What benefits HUL can achieve by better working capital management ?

Annexure-I-FMCG Industry and Porters Five forces Model Supply Demand Abundant supply in metros. Distribution networks are being beefed up to penetrate the rural areas. FMCG sector poised to grow 4-fold to $95 billion in 10 years, says Federation of Indian Chamber of Commerce and Industry-Technopak report. Huge investments in promoting brands, setting up distribution networks and intense competition, but the sector is not capital intensive. Some of the companies are integrated backwards, which reduces the supplier's clout. Manufacturing is largely outsourced. In case of branded products, there is little that the consumer can influence, but intense competition within the FMCG companies results in value for money deals for consumers (e.g. buy one, get one free concept). Competition: Competition is faced from both domestic, MNCs and also from cheaper imports, which are increasingly visible in urban markets. Price wars are a common phenomenon.

Barriers to entry

Bargaining power of suppliers Bargaining power of customers


Annexure-II Working capital cycle across industries

Receivable (in days) 44 17 127 79 97 77 51 28 26 35 82 11 17 26 51 18 Inventory (in days) 105 49 603 53 40 5 36 33 24 33 22 39 124 57 79 46 Working Net working Payable cycle cycle (in days) (in days) (in days) 149 66 730 132 137 82 87 61 50 68 104 50 141 83 130 64 97 48 138 76 72 39 9 78 65 67 77 40 84 54 37 76 52 18 592 56 65 43 78 -17 -15 1 27 10 57 29 93 -12 Debt/Equity (times) -112.0 0.9 0.7 1.4 0.5 0.2 0.9 0.1 0.4 1.0 0.8 0.8 1.8 0.5 1.4 0.2 ROE (%) 0.0 11.7 9.8 14.0 27.4 24.5 19.0 31.7 15.2 11.5 10.5 14.4 9.5 16.5 12.0 37.0

Industry Aviation Cement Real Estate Gems & Jewellery Engineering IT Metals Mining Oil & gas Petrochemicals Power Refineries Sugar Tea/Coffee Textile FMCG

Source: Ace Equity database

Annexure-III- Balance Sheet of HUL, Dabur India and Marico

Balance Sheet Sources Of Funds Total Share Capital Equity Share Capital Preference Share Capital Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Net Block Capital Work in Progress Investments Inventories Raw Material and Spare Parts Work-in-Progress Finished Goods Sundry Debtors Cash and Bank Balance Total Current Assets Current Liabilities Sundry Creditors Provisions Total CL & Provisions Total Assets HUL Mar '09 Mar '10 217.99 218.17 217.99 218.17 0 0 1,842.85 2,364.68 2,061.51 2,583.52 144.65 0 277.3 0 421.95 0 2,483.46 2,583.52 2,881.73 1,606.78 472.07 332.62 2,528.86 1,264.43 505.77 758.66 536.89 190.59 3,256.34 4,440.08 2,664.05 1,527.98 5,968.06 2,483.46 3,581.96 2,162.11 273.96 1,264.08 2,179.93 1,089.97 435.99 653.98 678.44 231.37 3,089.74 5,493.97 3,296.38 1,441.55 6,935.52 2,583.52 Dabur India Mar '09 Mar '10 86.51 86.51 0 651.69 738.2 8.26 130.72 138.98 877.18 518.77 308.32 51.71 232.05 261.72 130.86 52.34 78.52 112.36 32.16 406.24 381.87 229.12 315.1 696.97 877.17 86.76 86.76 0 662.48 749.38 24.27 81.8 106.07 855.45 687.23 450.95 23.31 348.51 298.44 149.22 59.69 89.53 130.48 48.8 477.72 471.73 283.04 440.1 911.83 855.45 Marico Mar '09 Mar '10 60.9 60.9 0 306.78 367.68 107.51 201.02 308.53 676.21 262.16 115.91 45.61 112.58 273.69 136.85 54.74 82.11 61.05 13.37 348.11 202.52 121.51 30.87 233.39 676.21 60.93 60.93 0 510.73 571.66 99.61 277.31 376.92 948.58 294.45 129.97 109.96 209.11 369.9 184.95 73.98 110.97 94.51 7.02 471.43 230.75 138.45 62.24 292.99 948.58

Source: Collected and compiled by author from Prowess

Annexure-IV Profit and Loss account of HUL, Dabur India and Marico
Profit & Loss account Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenses Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Financial Expenses Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Profit Before Tax Tax Reported Net Profit HUL Mar '10 18,462.34 693.22 17,769.12 199.73 19.47 17,988.32 9,003.97 244.34 936.3 254.4 3,737.52 814.36 14,990.89 2,797.70 2,997.43 6.98 2,990.45 184.03 2,806.42 648.36 2,202.03 Dabur India Mar '10 2,891.00 23.58 2,867.42 27.95 9.68 2,905.05 1,393.97 35.43 212.34 22.74 557.26 103.84 2,325.58 551.52 579.47 13.28 566.19 31.91 528.62 93.7 433.33 Marico Mar '10 2,031.90 30.4 2,001.50 10.6 11.48 2,023.58 1,096.58 5.24 103.11 76.28 398.75 0 1,679.96 333.02 343.62 18.3 325.32 25.21 300.11 57.55 235.02

Source: Collected and compiled by author from Prowess