PERFORMANCE OF FMCG COMPANIES OF INDIAN STOCK MARKET

PERFORMANCE OF FMCG COMPANIES OF INDIAN STOCK MARKET BINDIYA, K. MBAL 2002 DEPARTMENT OF AGRICULTURAL MARKETING, CO-OPERATION AND BUSINESS MANAGEMEN...
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PERFORMANCE OF FMCG COMPANIES OF INDIAN STOCK MARKET

BINDIYA, K. MBAL 2002

DEPARTMENT OF AGRICULTURAL MARKETING, CO-OPERATION AND BUSINESS MANAGEMENT UNIVERSITY OF AGRICULTURAL SCIENCES BANGALORE - 560 065 2014

PERFORMANCE OF FMCG COMPANIES OF INDIAN STOCK MARKET

BINDIYA, K. MBAL 2002

Project Report submitted to the University of Agricultural Sciences, Bangalore In partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION (Agribusiness Management) BANGALORE

JUNE 2014

Affectionately Dedicated to My Beloved Parents and Badikana Family

ACKNOWLEDGEMENT It is my pleasure to glance back and recall the path I travelled during the days of hard work and perseverance. This project report is the result of two years of work whereby I have been accompanied, supported and guided by many people. It is my heart’s turn to express my deepest sense of gratitude to all of those who directly and indirectly helped me in this endeavor. At the very outset, I feel inadequacy of words to express my profound indebtedness and deep sense of gratitude to my esteemed chairman, Dr. M. S. Ganapathy, Associate Professor, Dept. of Agricultural Marketing, Co-operation and Business Management, UAS, GKVK, Bangalore for his excellent guidance, constant support, close counsel and valuable suggestions throughout the period of my study. His enthusiasm, interest, concern, perfection and constructive criticism have always aroused my spirits to do more, to achieve higher. I am greatly indebted to him. It was really a great pleasure and privilege for me to be associated with him during my MBA (ABM) degree programme. I would like to thank the Members of my Advisory Committee, viz., Dr. P. K. Mandanna, Professor and Head, Dept. of Agricultural Marketing, Co-operation and Business Management, UAS, GKVK, Bangalore; Dr. B. M. Ramchandra Reddy Professor, Dept. of Agricultural Marketing, Co-operation and Business Management; Dr. C. P. Gracy Professor, Dept. of Agricultural Marketing, Co-operation and Business Management, UAS, GKVK, Bangalore; and K. N. Krishnamurthy, Associate Professor, Dept. of Statistics, UAS, GKVK, Bangalore who provided all kind of support to me in completion of the project report and post–graduate study. My sincere gratitude and heartfelt thanks to all their valuable guidance given during the course of study. I am Very Grateful to Dr. Lalith Achoth, Professor and Head, department of Dairy Economics and Business Management, KVAFSU, Bangalore for helping and guiding me to carrying out my research work and his unbeaten encouragement thought my MBA (ABM) programme. Once again I express my whole hearted thanks to Dr. M. S. Jayaram, Professor and Head, Department of Agricultural Marketing, Co-operation & Business

Management, UAS, GKVK, Bangalore for creating a flexible high performance learning environment throughout my post graduate programme. I greatly acknowledge the cooperation and help extended by my teachers Dr. B. M. Shashidhara, Dr. Nanjunda Gowda, Dr. T. N. Venkata Reddy, Dr. Keshava Reddy, Mr. P. V. Ramegowda and Dr. M. R Girish Department of Agricultural Marketing, Co-operation & Business Management, UAS, GKVK, Bangalore for their valuable suggestions and support during the course of investigation. The love and patience of my family have been instrumental for me to achieve anything in life. Mere words cannot express my indebtedness to my father Sri. K. Monappa Gowda mother Smt. K. Nalini and my brother Mr. Arjun, K. M. for their support and encouragement. Friendship is the most important ingredient in the recipe of life and it adds more flavour when that is from different places with different languages and cultures. I am fortunate to have a myriad of friends here. I am thankful for the emotional support and encouragement from my beloved friends, viz., Shruthi Karvi, Wilson, Suhas, Deeksha, Deekshith, Chitra, Deepana, Deepak, Ravi, Basvaraj, Madhu, Sudha, Suma, Bhagu, Vijetha and Varun .I also thank all my dear friends who encouraged me in each and every step of the life during my post-graduation and they deserve a more personal note of gratitude. I remain ever thankful to the non-teaching staff, viz., Mrs. W. J. Tanuja, Mr. Ashok Doddamani, Mr. Manjunath, Mr. Vinod and Mr. Rajanna of Department of Agricultural Marketing, Co-operation & Business Management, University of Agricultural Sciences, GKVK, Bangalore for providing me the necessary materials during my project work. Any omission in this acknowledgement does not mean indeed.

Bangalore June, 2014

(Bindiya, K.)

Performance of FMCG Companies of Indian Stock Market BINDIYA, K ABSTRACT FMCG companies in India have a market size of 3 trillion. An attempt has been made in this study to evaluate the financial performance of FMCG companies and to analyze the factors influencing the growth of selected FMCGs. The study also attempts to determine the factors that distinguish good companies from poor performing companies. The study is based on the secondary data collected from 44 FMCG companies listed in Indian stock market from the published annual accounts and balance sheets of the companies for the financial year 2008-09 to 2012-13. Statistical techniques, ratio analysis, CAGR and Value at Risk were employed to analyze the financial data of the companies. The overall financial performance of the FMCG companies look good in majority of the companies like Colgate Palmolive, ITC, Amrit Corporation, Murali Industries, Dabur India, Tata Coffee and Flex Foods have been rated as best companies and companies like Sanwaria Agro oils, Modern Dairies and Kwality Dairies who have identified as underperforming companies. Efficiency, cost, profitability, net worth and liquidity dimension associated with financial performance of the companies were the driving factors influencing the performance of the companies in that order. Factors like current ratio and debt equity ratio, debt to capital ratio and dividend payout ratio are significant factors contributing to the good performance of the companies. Where as, low net profit ratio and earnings per share contributing to the poor performance of the companies.

Signature of the student

Dr. M.S. Ganapathy (Major advisor)

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CONTENTS CHAPTERS

TITLE

Page No.

1

INTRODUCTION

1-7

2

REVIEW OF LITERATURE

8-23

3

METHODOLOGY

24-38

4

RESULTS

39-58

5

DISCUSSIONS

59-66

6

SUMMARY AND POLICY IMPLICATIONS

67-70

7

REFERENCES

71-76

APPENDICES

77-79

LIST OF TABLES Sl. No

TITLE

Page No.

1.1

Top 10 companies in FMCG sector

3

4.1

Year wise Growth pattern in FMCG sector

40

4.2

Cumulative Growth pattern of FMCG sector

41

4.3

Factors discriminating financial performance of the good and poor performing companies

43

4.4

Analysis of Financial performance of FMCG companies

4.5

Rotated component matrices of the factors/dimension

53

4.6

Top ten FMCG sector based on factor analysis

54

4.7

Medium performing FMCG sector based on factor analysis

54

4.8

Least performing FMCG sector based on factor analysis

55

4.9

Ranking of companies based on ratio

55

4.10

Analysis of Investment risk in FMCG Companies

57

4.11

Analysis of Investment risk and growth pattern in FMCG Companies

58

47-52

LIST OF FIGURES Figure No.

Title

Page No.

1.

Year wise Growth pattern in FMCG sector

40-41

2.

Cumulative Growth pattern Of FMCG sector

42-43

3.

Investment risk and growth pattern in FMCG Companies

58-59

CHAPTER I

INTRODUCTION Fast – Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) are the products that are sold quickly and at relatively low cost. The margin of profit on FMCG products is relatively small. However the volume of goods sold to millions of consumers is what it makes the difference in the turnover and profit. Hence, the financial performance of FMCGs depends on number of goods sold. FMCG industry is innovative, full of rich experience, reaches worldwide. The FMCG industry in India is one of the largest sectors in the country and over the years has been growing at a steady pace. FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars. The best known examples for FMCG companies in the market are Colgate Palmolive, ITC, Britannia, Tata Coffee and Nestle. The examples for FMCG brands are Coca-Cola, PepsiCo, Mondelez and Kraft Foods. The FMCG sector represents consumer goods which are required for daily or frequent use. The main segments of this sector are personal care, household care, branded and packaged food, beverages and tobacco. The FMCG sector is an important contributor to India‟s GDP and it is the fourth largest sector of the Indian economy. Items in this category are meant for frequent consumption and they usually yield a high return. The market size of FMCG is 3 trillion with rural India contributing to one third of the sector‟s revenues. The sector has a strong MNC presence, well established distribution network and high competition between organized and unorganized players. FMCG products are branded while players incur heavy on advertising, marketing, packaging and distribution costs. The pricing of the final product also depends on the costs of raw material used. The growth of the sector has been driven by both the rural and urban segments. India is becoming one of the most important country in the production of raw materials and cheaper labour costs. The Indian FMCG industry represents nearly 2.5% of the country‟s GDP. The industry has tripled in size in past 10 years and has grown at nearly 17 Per cent Compound annual growth rate (CAGR) in the last 5 years driven by rising income levels, increasing urbanization and strong rural demand and favorable demographic trends. The sector accounted for 1.9 Per cent of the nation‟s total FDI inflows in April 2000 September 2012. Cumulative FDI inflows into India from April 2000 to April 2013 in the food processing sector stood at 9,000.3 crore, accounting for 0.96 Per cent of overall FDI inflows, while soaps, cosmetics and toiletries, accounting for 0.32 Per cent of overall FDI at 3,115.5 crore. Food products and personal care together make up two-third of the sector‟s revenues. Rural India accounts for more than 700 million consumers or 70 Percent of the Indian population and accounts for 50 Per cent of the total FMCG market.

Performance of FMCG Companies of Indian Stock Market

1

India's labor cost is the lowest in the world, after China & Indonesia, giving it a competitive advantage over other countries.

1.1 Evolution of FMCG companies in India In India, companies like Indian Tobacco Company (ITC), Hindustan Levers Limited(HCL), Colgate, Cadbury and Nestle have been a dominant force in the FMCG sector well supported by their products competition and branches with least supported by high entry barriers (import duty was high). Therefore companies are able to charge a premium for their products, with higher margins. However with the gradual opening up of the economy during the last decade, FMCG companies are forced to compete in the market with reduced market share. In the process, margins on FMCG products have come down drastically during recent years.

1.2 Current situation The growth potential for FMCG companies looks promising over long- term horizon, as the per-capita consumption of these products in the country is lowest in the world. As per the recent Consumer Survey undertaken by KSA- Technopak, of the total consumption expenditure, nearly 40 per cent of consumer money was spent on groceries and 8 per cent on personal care products. At present a rapid urbanization, increased literacy and rising per capita income are the key growth drivers for the sector. Around 45 per cent of the population in India is below 20 years of age and the proportion of the young population is expected to increase in the coming decade. (Source: KSA-Technopak consumer outlook 2006)

1.3 Indian FMCG sectors The FMCG sector is an important contributor to India‟s GDP and it is the fourth largest sector of the Indian economy. Items in this category are meant for frequent consumption and they usually yield a high return. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, and household accessories and extends to certain electronic goods. The Indian FMCG sector, which is the fourth biggest sector in the Indian economy, has a market size of $3 trillion with rural India contributing to one third of the sector‟s revenues. The Indian FMCG sector is highly fragmented, volume driven and characterized by low margins. This sector has a strong MNC presence, well established distribution network and high competition between organized and unorganized players. FMCG products are branded while players incur heavy on advertising, marketing, packaging and distribution costs. The pricing of the final product also depends on the costs of raw material used. The growth of the sector has been driven by both the rural and urban segments. India is becoming one of the most attractive markets for foreign FMCG players due to easy availability of imported raw materials and cheaper labour costs.

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Table 1.1: Top 10 companies in FMCG sector Sl. No.

Companies

1.

Hindustan Unilever Ltd.

2.

Colgate-Palmolive

3.

ITC Limited

4.

Nestle

5.

Parle Agro

6.

Britannia Industries Limited

7.

Marico Limited

8.

Proctor &Gambler

9.

Godrej Group

10.

Amul

Source: inindia.com The companies indicated in Table 1.1, are the leaders in their respective sectors.HUL, a 52% subsidiary of Unilever, is India's largest FMCG Company. With over 35 brands spanning 20 distinct categories, the Company is a part of the everyday life of millions of consumers across India. HUL, with its iconic brands, has maintained its growth which is impressive given the recent price hikes across product categories and a strong competitive scenario, indicating a revival in consumer demand and higher growth in the mid/premium market segment. ITC has posted 22 per cent growth in consolidated net profit at Rs. 76.1 billion in financial year 2013, mainly on account of strong performance across all financial parameters, leveraging its corporate strategy of creating multiple drivers of growth. Better revenue mix, higher operational efficiency and significant rise in cigarette price enabled ITC to expand earnings before interest, taxes, depreciation, and amortization (EBITDA).

1.4 FMCG category and products Personal care Oral care, hair care, skin care, personal wash (soaps), cosmetics and toiletries, deodorants, perfumes, paper products (tissues, diapers, sanitary),shoe care. The personal care products (PCP) market in India is estimated be worth USD 4 billion per annum. Personal hygiene products (including bath and shower products, deodorants etc.), hair Performance of FMCG Companies of Indian Stock Market

3

care, skin care, colour cosmetics and fragrances are the key segments of the personal care market. Each of these segments exhibits its unique trends and growth patterns. For example, the largest segment of personal hygiene products, largely dominated by bar soaps, has grown at 5 per cent per annum over the last five years. In comparison, the second largest segment, hair care products has seen a much higher growth of 9-10% per annum during the same period. The hair care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. The coconut oil market accounts for 72 per cent share in the hair oil market. The skin care market is at a primary stage in India. With the change in life styles, increase in disposable incomes, greater product choice and availability, people are becoming more alert about personal grooming. The oral care market can be segmented into toothpaste – 60 per cent, toothpowder – 23 per cent and toothbrushes – 17 per cent. Household care Fabric wash (laundry soaps and synthetic detergents), household cleaners (dish/utensil cleaners, floor cleaners, toilet cleaners, air fresheners, insecticides and mosquito repellants, metal polish and furniture polish). The fabric wash market size is estimated in 2013 is expected to be USD 1 billion, household cleaners to be USD 239 million, with the production of synthetic detergents at 2.6 million tonnes. The demand for detergents has been growing at an annual growth rate of 10 to 11 per cent during the past five years. On account of convenience of usage, increased purchasing power, aggressive advertising and increased penetration of washing machines, the urban market prefers washing powder and detergents to bars. The regional and small unorganized players account for a major share of the total detergent market in volumes. Household Care category recorded robust volume and value growth during the year through focused innovation in the portfolio to provide greater consumer value. Vim bar continues to delight consumers by delivering superior performance and new offerings like the AntiGerm Bar and the Monthly Tub Pack. Vim liquid continues to develop the liquid dish wash category driven by superior product quality and strong advertising. It has effectively accomplished the dual job of growing the liquids market by reaching out to more households, while increasing consumption in existing households. Domex continued to provide clean and germ free toilets to the consumers. Branded and packaged food and beverages Health beverages, soft drinks, staples/cereals, bakery products (biscuits, bread, cakes), snack food, chocolates, ice cream, tea, coffee, processed fruits, vegetables and meat, dairy products, bottled water, branded flour, branded rice, branded sugar, juices etc. Food processing industry is one of the largest industries in India, ranking fifth in terms of production, growth, consumption, and export. The total value of Indian food processing industry is expected to touch USD 194 billion by 2015 from a value of USD 121 billion in 2012, according to Indian Council of Agricultural Research (ICAR). The packaged food segment is expected to grow 9 per cent annually to become Rs. 6 lakh

4

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crore industries by 2030, dominated by milk, sweet and savoury snacks and processed poultry, among other products, according to the report by CII-McKinsey. The ready-to-drink tea and coffee market in India is expected to touch Rs 2,200 crore in next four years, according to estimates arrived at the World Tea and Coffee Export of 2013. Branding could drive the next growth wave in the country‟s food processing sector. The total soft drink (carbonated beverages and juices) market is estimated in 2013 at USD 1 billion. The market is highly seasonal in nature with consumption varying from 25 million crates per month during peak season to 15 million during offseason. The market is predominantly urban with more than 25 per cent contribution from rural areas. Coca cola and Pepsi dominate the Indian soft drinks Market.

1.5 FMCG industry economy FMCG industry provides a wide range of consumables and accordingly the amount of money circulated against FMCG products is also very high. The competition among FMCG manufacturers is also growing and as a result of this, investment in FMCG industry is also increasing, specifically in India, where FMCG industry is regarded as the fourth largest sector with total market size of Rs. 3 trillion. FMCG industry is regarded as the largest sector in New Zealand which accounts for 5 Per cent of Gross Domestic Product (2013).

1.6 Growth prospects With the presence of 12.2 Per cent of the world population in the villages of India, the Indian rural FMCG market is something no one can overlook. Increased focus on farm sector will boost rural incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in the market. Because of the low per capita consumption for almost all the products in the country, FMCG companies have immense possibilities for growth. And if the companies are able to change the mindset of the consumers, i.e. if they are able to take the consumers to branded products and offer new generation products, they would be able to generate higher growth in the near future. The demand in urban areas would be the key growth driver over the long term. Also, increase in the urban population, along with increase in income levels and the availability of new categories, would help the urban areas maintain their position in terms of consumption. At present, urban India accounts for 66 Per cent of total FMCG consumption, with rural India accounting for the remaining 34 Per cent. However, rural India accounts for more than 40 Per cent consumption in major FMCG categories such as personal care, fabric care, and hot beverages. In urban areas, home and personal care category, including skin care, household care and feminine hygiene, will keep growing at relatively attractive rates. Within the foods segment, it is estimated that processed foods, bakery, and dairy are long-term growth categories in both rural and urban areas.

Performance of FMCG Companies of Indian Stock Market

5

1.7 Outlook of the FMCG sector The outlook for Indian FMCG industry is bright amid higher income levels and the expansion of the model retail format. Moreover, expectation of rise in disposable incomes of rural dwellers due to the direct cash transfer scheme may bolster the sector‟s performance in 2013. Overall, FMCG sector has a great opportunity for growth in the country, with the rising disposable incomes, increasing rural consumption, the growing population, education, urbanization, rising modern retail, and a consumption-driven society. Low cost labor and low per capita consumption of almost all products in India, gives the country a competitive advantage as many MNC's have established their plants in India to outsource for domestic and export markets. Meanwhile, there exists huge untapped opportunities for the sector. Indian companies have their presence across the value chain of FMCG sector, right from the supply of raw materials to packaged goods in the food-processing sector. This brings India a more cost competitive advantage. However, the sharp depreciation in the value of rupee, new norms of standard-size packaging, increase in raw material costs due to upward spiraling interest rates and inflation together might tend the performance of the FMCG sector. Increasing urbanization and higher disposable incomes are encouraging many consumers to move from unbranded to branded products, bolstering growth in the FMCG market. Despite the current slowdown, demand for premium products in the health and wellness space is rising, encouraging companies to launch more premium products. Moreover, demand for sophisticated personal care products is also on the rise as people become beauty and health conscious. Hence, we observe a positive outlook to FMCG companies for 2013 following strong consumption demand of the country.

1.8 Need for the study FMCG is one of the fastest growing sectors in the country. Many new players are entering the business with novel formats to reach the consumers. There are already well established corporate companies operating in the sector. This sector is dynamic characterized by high turnover and low percentage of profit. This study is a humble attempt to determine the financial performance of FMCG companies. The Normal practice to evaluate the financial performance of the companies is to apply the ratio analysis covering solvency, liquidity, profitability and turnover and market test ratios. Further, special emphasis was given by applying the multivariate analytical tools like factor analysis and discriminant analysis to identify the major factors influencing the financial performance of the companies as also to determine the factors that account for good performance of the companies.

1.9 Objectives of the study 1) To analyze the growth and variability of FMCG stock price 2) To analyze performance of FMCG sector with market index 3) To analyze investment risk in FMCG

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Bindiya, K.

1.10 Hypotheses of the study 1) There is significant growth in FMCG prices 2) FMCG sector has better performance 3) Compared to other sector FMCG has low investment risk.

1.11 Limitation of the study The study relies on five years data to measure the financial performance of FMCGs. To this extent the results cannot be generalized for all FMCG companies. However pattern observed could repeat each year as the period of the study 2008-2013 was a normal year.

1.12 Presentation of the study The study has been presented in six chapters as indicated below: Chapter-I deals with the nature, importance and specific objectives of the study; Chapter-II describes the comprehensive review of the relevant research work done in the past related to the present study; Chapter-III outlines the nature and source of data and analytical tools and techniques employed in the study; Chapter-IV is devoted to present the main findings of the study; Chapter-V discusses the results of the study; Chapter-VI provides the summary of the whole study and also suggests the policy implication based on findings of the study. At the end, important references have been listed relating to the present study.

Performance of FMCG Companies of Indian Stock Market

7

CHAPTER II

REVIEW OF LITERATURE A review of past research helps in identifying the conceptual and methodology issues relevant to the study. This will enable the research to collect relevant data and subject them to sound reasoning and meaningful interpretation. Keeping in view of the objectives of the study, reviews are presented under the following headings. 2.1 Growth and Variability factor 2.2 Financial performance 2.3 Investment Risk

2.1 Growth and Variability factor The role of stock market in improving informational asymmetric has been questioned by Stiglitz (1985). It is argued that stock markets reveal information through rapid price changes creating a free rider problem that reduces investors‟ incentives to initiate costly search. There are also some doubts in regards to contribution of liquidity itself to long-term growth. It is indicated that increased liquidity may prevent growth in three ways. Firstly, it may reduce saving rates through income and substitution effects. Secondly, by reducing uncertainty associated with investments, greater stock market liquidity may reduce saving rates because of the ambiguous effects of uncertainty on savings. Thirdly, stock market liquidity encourages investors‟ shortsightedness negatively affecting corporate governance and thereby reducing growth. The ex post monitoring of management and exertion of corporate control also induces the need for financial intermediaries. This is the focus of the costly state verification literature (Williamson, 1987). The monitor need not be monitored when his asset holdings are perfectly diversified (Diamond, 1984). Stock markets, in fact, allow better corporate control. Equity capital introduces a new possibility of aligning interests between the management and the ownership of the firm. Chen et al., (1986) investigated whether macroeconomic variables can predict recessions in the stock market. Series such as interest rate spreads inflation rates, money stocks, aggregate output, and unemployment rates are evaluated individually. Empirical evidence from monthly data on the standard and poor's S&P 500 price index suggests that among the macroeconomic variables that are considered, yield curve spreads and inflation rates are the most useful predictors of recessions in the U.S. stock market according to in-sample and out-of sample forecasting performance. Darat and Mukherjee (1987) applied a vector auto regression (VaR) model and found that a significant causal relationship exists between stock returns and selected macroeconomic variables of China, India, Brazil and Russia which are emerging economies of the world using oil price, exchange rate, and moving average lags values as explanatory variables employed ma (moving average) method with OLS (ordinary least square) and found insignificant results which postulate inefficiency in market. Finally

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they concluded that in emerging economies the domestic factors influence more than external factors, i.e., exchange rate and oil prices. Bahmani and Sohrabian (1992) studied the causal relationship between U.S. stock market (S&P 500 index) and effective exchange rate of dollar in the short period of time. Their theory established bidirectional causality between the two for the time period taken. However, cointegration analysis failed to identify any long run relationship between the two variables. Mukherjee and Naka (1995) applied to analyze the relationship between the Japanese stock market and exchange rate, inflation rate, money supply, real economic activity, long-term government bond rate, and call money rate. They concluded that a cointegrating relation indeed existed and that stock prices contributed to this relation. Maysami and koh (2000) examined such relationships in Singapore. They found that inflation money supply growth, changes in short- and long-term interest rate and variations in exchange rate formed a cointegrating relation with changes in Singapore‟s stock market levels. Demirguc and Maksimovic (1996) mentioned that partial compensation in company stocks mitigated the severe principal agent problems. The relationship is non monotonic. As the number of shareholders with voting rights increases, the diffused ownership makes corporate control more difficult. Financial markets are also considered as effective and efficient channels of savings mobilization. Stock markets establish a market place where investors are inclined and comfortable to give up control of their savings. A large fraction of small investors participate in stock market due to small denomination of securities. Greenwood and Smith (1997) argue that stock markets lower the cost of mobilizing savings facilitating investments into the most productive technologies and diversifying the risks. Obstfeld (1994) indicates that international risk sharing through internationally integrated stock markets improve resource allocation and accelerate growth. Bencivenga, et al. (1996) and Levine and Renelt (1992) suggested that stock market liquidity plays a major role in economic growth. Abdalla and Murinde (1997) investigated the intersections between exchange rates and stock prices in the emerging financial markets of India, Korea, Pakistan and the Philippines. They found that results show unidirectional granger causality from exchange rates to stock prices in all the sample countries, except the Philippines, where they found that the stock price lead the exchange rate. Mookerjee (1997) studied the Singapore stock market pricing mechanism by investigating whether there were long-term relationships between macroeconomic variables and stock market pricing. They found that three out of four macroeconomic variables were cointegrated with stock market prices. Using bi-variate cointegration and causality tests, they noted significant interactions between money supply and foreign exchange reserves and stock prices for the case of Singapore.

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Levine and Zervos (1998) showed a positive and significant correlation between stock market development and long run economic growth in their study of 47 countries. However, their study relies on a cross-sectional approach with well known empirical limitations. Theoretically, the conventional literature on growth was not adequate to explore the relationship between financial markets and economic growth due to the fact that it is primarily focused on the steady-state level of capital stock per worker or productivity, but not on the rate of growth, that is, in fact, endorsed to exogenous technical progress. The growing interest of recent literature in the link between financial development and growth stems from the insights of endogenous growth models, in which growth is self-sustaining and influenced by initial conditions. In this framework, the stock market is shown not only to have level effects but also rate effects. Ibrahim and Mansor (1999) investigated the dynamic interactions between the composite Index and seven macroeconomic variables (industrial production index, money supply, foreign reserves, credit aggregates and exchange rate) and concluded that Malaysian stock market was informational inefficient. Chong and Koh‟s (2003) results were similar and showed that stock prices, economic activities, real interest rates and real money balances in Malaysia were linked in the long run both in the pre and post capital control sub periods. Kwon and shin (1999) applied Engle-granger cointegration and the granger causality tests and found that the Korean stock market was cointegrated with a set of macroeconomic variables. However, using the granger-causality test on macroeconomic variables and the Korean stock index, the authors found that the Korean stock index was not a leading indicator for economic variables. Naka et al., 1999 analyzed long-term equilibrium relationships among selected macroeconomic variables and the BSE sensex. The study used data for the period 1960 to 1995 and macroeconomic variables; namely, the industrial production index, the consumer price index, a narrow measure of money supply, and the money market rate in the Bombay interbank market. The study employed a Vector Error Correction Model (VECM) to avoid potential misspecification biases that might result from the use of a more conventional VAR modeling technique. The study found that the five variables were cointegrated and there exists three long-term equilibrium relationships among these variables. The results of the study also suggested that domestic inflation was the most severe deterrent to Indian stock markets performance, and domestic output growth as its predominant driving force. Pethe and karnik (2000) using Indian data for April 1992 to December, 1997, attempted to find the way in which stock price indices were affected by and had affected other crucial macroeconomic variables in India. But, this study had run causality tests in an error correction framework on non-cointegrated variables, which is inappropriate and not econometrically sound and correct. The study reported weak causality running (i.e., sensex and S&P CNX nifty) but not the other way round. In other words, it holds the view that the state of economy had affected stock prices.

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Bhattacharya and Mukherjee (2002) investigated the nature of the causal relationship between BSE sensitive index and the five macroeconomic aggregates in India (i.e., IIP, money supply, national income, interest rate and inflation rate) using monthly data for the period 1992-93 to 2000. By applying the techniques of unit–root tests, co-integration and the long–run granger non–causality test recently proposed by Toda and Yamamoto (1995), their major findings suggested that there was no causal linkage between stock prices and money supply, national income and interest rate while IIP lead the stock price, and there was two- way causation between stock price and inflation rate. Ahmed (2008) studied and found the nature of the causal relationships between stock prices (i.e., nifty and sensex) and the key macroeconomic variables (i.e., IIP, FDI, exports, money supply, exchange rate, interest rate) representing real and financial sectors of India. Using quarterly data, Johansen‟s approach of co-integration and Toda and Yamamoto (1995) granger causality test have been applied to explore the long-run relationships while Bayesian vector auto regression modeling for variance decomposition and impulse response functions has been applied to examine short run relationships. The study indicates that stock prices in India lead economic activity except movement in interest rate which seems to lead the stock prices. The study indicates that Indian stock market seems to be driven not only by actual performance but also by expected potential performances. The study reveals that the movement of stock prices is not only the outcome of behavior of key macro economic variables but it is also one of the causes of movement in other macro dimension in the economy. Kumar (2008) established and validate the long-term relationship of stock prices with exchange rate and inflation in Indian context. There were numerous studies on the relationship of stock indices with macroeconomic variables. This gave a strong subjective background to test the existence of any such relationship in India. The research primarily dealt with an empirical method by combining different statistical techniques to check the presence of co-integration between the stock index (sensex) and other variables. Cointegration is a well accepted indicator of a long term relationship between more than one time series variables. The study took into consideration past ten years experience of Indian economy reflected into the stock index, wholesale price index and exchange rates. A causal relationship could not be established without the existence of cointegration between the selected macroeconomic variable. Anon (2009) reviewed the Indian stock market and opined that it is likely to extend its gains, and therefore provides an opportunity for individuals to invest in mutual funds. The study also states that equity mutual funds are among the best performing asset classes and mutual fund industry has an enormous market potential in India. Dharmendra Singh (2010) tried to explore the relation especially the causal relation between stock market index i.e. BSE sensex and three key macro economic variables by using correlation, unit root stationary tests and granger causality test. Monthly data has been used for all the variables and results showed that the stock market index, IIP, WPI, and exchange rate contained a unit root and were integrated of order

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one. They found that results show bilateral granger causality between IIP and sensex while WPI is having strong correlation and unilateral causality with sensex which means Indian Stock market is approaching towards informational efficiency at least with respect to two macroeconomic variables, viz. Exchange rate and inflation. Tripathy (2011) studied investigated the market efficiency and causal relationship between selected macroeconomic variables and the Indian stock market by using q test, breusch-godfrey test, unit root test, granger causality test. The study confirms the presence of autocorrelation in the Indian stock market and macro economic variables which implies that the market fell into form of efficient market hypothesis. Then the granger-causality test shows the bidirectional relationship between stock market and interest rate and exchange rate, international stock market and BSE volume, exchange rate and BSE volume. The study also reported unidirectional causality running from international stock market, domestic stock market, interest rate, exchange rate and inflation rate indicating sizeable influence in the stock market movement. Dasgupta (2012) has attempted to explore the long-run and short-run relationships between BSE sensex and four key macroeconomic variables of Indian economy by using descriptive statistics, ADF tests, Johansen and Juselius‟s cointegration test and granger causality test. Monthly data has been used for all the variables, i.e., BSE sensex, WPI,, IIP, ex and call money rate. Results showed that all the variables has contained a unit root and are integrated of order one. Johansen and Juselius‟s cointegration test pointed out at least one cointegration vector and long run relationships between BSE sensex with index of industrial production and call money rate. Granger causality test was then employed. The granger causality test has found no short-run unilateral or bilateral causal relationships between BSE sensex with the macroeconomic variables. Therefore, it is concluded that, Indian stock markets had no informational efficiency.

2.2 Financial performance Carlos et al. (1972) stated that the ratio analysis in financial terms along with a few dimensions appeared to be essential in evaluating the business performance of an organization. Net value added according to him, is the better ingredient for ratio analysis in assessing managerial performance. Ray (1974) highlighted the significance of financial ratio and analysis of financial statements. He also suggested that the ratios of current assets to current liabilities, current liabilities to tangible net worth, total liabilities to tangible net worth, funded debt to net working capital, fixed assets to tangible net worth, net sales to inventory, inventory to net working capital, average collection period, net sales to tangible net worth, net sales to net working capital were useful. The implication and importance of all the above ratios in determining the financial status of the business were lucidly outlined. Salmi and Martikainen (1994) has suggested that a systematic framework of financial statement analysis along with the observed separate research trends might be useful for furthering the development of research. If the research results in financial ratio

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analysis are to be useful for the decision makers, the results must be theoretically consistent and empirically generalizable. Jae et al. (1999) had explained that the financial statement of an enterprise present the raw data of its assets, liabilities and equities in the balance sheet and its revenue and expenses in the income statement. Without subjecting these to data analysis, many fallacious conclusions might be drawn concerning the financial condition of the enterprise. Financial statement analysis is undertaken by creditors, investors and other financial statement users in order to determine the credit worthiness and earning potential of an entity. Kennedy and Muller (1999) repeated that the analysis of financial statements are attempt to determine the significance and meaning of financial statements data so that the forecast may be made of the prospects for future earnings, ability to pay interest and debt maturates (both current and long term) and profitability and sound dividend policy”. Elizabeth et al. (2004) had stated that the paper in the title of efficiency, customer service and financing performance among Australian financial institutions showed that all financial performance measures as interest margin, return on assets, and capital adequacy are positively correlated with customer service quality scores. Jonas (2005) repeated that ratio analysis was an invaluable tool for making an investment decision. Even so, many new investors would rather leave their decisions to fate than try to deal with the intimidation of financial ratios. The truth is that ratios aren't that intimidating, even if you don't have a degree in business or finance. Using ratios to make informed decisions about an investment makes a lot of sense, once you know how use them. Khan and Jain (2006) have explained that the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much can be learnt about a firm from a careful examination of its financial statements as invaluable documents / performance reports. The analysis of financial statements is, thus, an important aid to financial analysis. John et al. (2006) have said that the financial statement analysis is the application of analytical tools and techniques to general-purpose financial statements and related data to derive estimates and inferences useful in business analysis. Financial statement analysis reduces reliance on hunches, guesses, and intuition for business decisions. It decreases the uncertainty of business analysis. Peeler (2006) indicated that a sound business analysis tells others a lot about good sense and understanding of the difficulties that a company will face. We have to make sure that people know exactly how we arrived to the final financial positions. We have to show the calculation but we have to avoid anything that is too mathematical. A business performance analysis indicates the further growth and the expansion. It gives a physiological advantage to the employees and also a planning advantage.

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Rameshkumar (2006) argued that ratio analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare the ratios with the average of similar businesses for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow solving business problems before the business get destroyed. Carlos (2007) explained that any analysis of the firm, whether by management, investors or other interested parties, must include an examination of the company‟s financial data. The most obvious and readily available source of this information is the firm‟s annual report. The financial statements shall, in conformity with generally accepted accounting practice, fairly present the state of the affairs of the company and the results of operations for the financial year. Pandey (2007) had stated that the financial statements contain information about the financial consequences and sources and uses of financial resources, one should be able to say whether the financial condition of a firm is good or bad; whether it is improving or deteriorating. One can relate the financial variables given in financial statements in a meaningful way which will suggest the actions which one may have to initiate to improve the firm‟s financial condition. Susan (2008) emphasized that financial analysis using ratios between key values help investors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds it has deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option. Rachchh, M (2011) suggested that the financial statement analysis involves analyzing the financial statements to extract information that can facilitate decision making. It is the process of evaluating the relationship between component parts of the financial statements to obtain a better understanding of an entity‟s position and performance.

2.3 Investment Risk Bhalla (1982) reviewed the various factors influencing the equity price and price earnings ratio. He was of the opinion that equity prices were affected primarily by financial risk considerations that, in turn, affect earnings and dividends. He also stated that market risk in equity was much greater than in bonds, and it influenced the price also. He disclosed that many analysts follow price earnings (P/E) ratio to value equity, which was equal to market price divided by earnings per share. He observed that inflationary expectations and higher interest rates tend to reduce P/E ratios whereas growth companies tend to have higher P/E ratios. He suggested that an investor should examine the trend of P/E ratios over time for each company.

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Jack (1986) revealed the importance of the rate of return in investments and reviewed the possibility of default and bankruptcy risk. He opined that in an uncertain world, investors cannot predict exactly what rate of return an investment will yield. However he suggested that the investors can formulate a probability distribution of the possible rates of return. He also opined that an investor who purchases corporate securities must face the possibility of default and bankruptcy by the issuer. Financial analysts can foresee bankruptcy. He disclosed some easily observable warnings of a firm's failure, which could be noticed by the investors to avoid such a risk. Preethi (1986) disclosed the basic rules for selecting the company to invest in. She opined that understanding and measuring return and risk is fundamental to the investment process. According to her, most investors are 'risk averse'. To have a higher return the investor has to face greater risks. She concluded that risk is fundamental to the process of investment. Every investor should have an understanding of the various pitfalls of investments. The investor should carefully analyze the financial statements with special reference to solvency, profitability, EPS, and efficiency of the company. David et al. (1990) reviewed the important risks of owning common stocks and the ways to minimize these risks. They commented that the severity of financial risk depends on how heavily a business relies on debt. Financial risk is relatively easy to minimize if an investor sticks to the common stocks of companies that employ small amounts of debt. They suggested that a relatively easy way to ensure some degree of liquidity is to restrict investment in stocks having a history of adequate trading volume. Investors concerned about business risk can reduce it by selecting common stocks of firms that are diversified in several unrelated industries. Lewis, M (1992) reviewed the nature of market risk, which according to him is very much 'global'. He revealed that certain risks that are so global that they affect the entire investment market. Even the stocks and bonds of the well-managed companies face market risk. He concluded that market risk is influenced by factors that cannot be predicted accurately like economics conditions, political events, mass psychological factors, etc. Market risk is the systemic risk that affects all securities simultaneously and it cannot be reduced through diversification. Yasaswy (1993) evaluated the quantum of risks involved in different types of stocks. Defensive stocks are low risk stocks and hence the returns are relatively slow but steady. Cyclical stocks involve higher risks and hence the rewards are higher when compared to the growth stocks. Growth stocks belong to the medium risk category and they offer medium returns which are much better, than defensive stocks, but less than the cyclical stocks. The market price of growth stocks does fluctuate, sometimes even violently during short periods of boom and bust. He emphasized the financial and

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organizational strength of growth stocks, which recover soon, though they may hit bad patches once in a way. Donaid et al. (1994) analyzed the relation between risk, investor preferences and investor behavior. The risk return measures on portfolios are the main determinants of an investor's attitude towards them. Most investors seek more return for additional risk assumed. The conservative investor requires large increase in return for assuming small increases in risk. The more aggressive investor will accept smaller increases in return for large increases in risk. They concluded that the psychology of the stock market is based on how investors form judgments about uncertain future events and how they react to these judgments. Shivakumar (1994) disclosed new parameters that will help investors identify the best company to invest in. He opined that economic value added (EVA) is more powerful than other conventional tools for investment decision making like EPS and price earnings ratio. Eva looks at how capital raised by the company from all sources has been put to use. Higher the EVA, higher the returns to the shareholder. A company with a higher EVA is likely to show a higher increase in the market price of its shares. To be effective in comparing companies, he suggested that EVA per share (EVAPS) must be calculated. It indicates the super profit per share that is available to the investor. The higher the EVAPS, the higher is the likely appreciation in the value in future. He also revealed a startling result of EVA calculation of companies in which 200 companies show a negative value addition that includes some blue chip companies in the Indian stock market. Pattabhi (1995) emphasized the need for doing fundamental analysis and doing equity research (ER) before selecting shares for investment. He opined that the investor should look for value with a margin of safety in relation to price. The margin of safety is the gap between price and value. He revealed that the Indian stock market is an inefficient market because of the absence of good communication network, rampant price rigging, and the absence of free and instantaneous flow of information, professional broking and so on. He concluded that in such inefficient market, equity research will produce better results as there will be frequent mismatch between price and value that provides opportunities to the long-term value oriented investor. He added that in the Indian stock market investment returns would improve only through quality equity research. Philippe et al. (1996) reviewed international factors of risks and their effect on financial markets. He opined that domestic investment is a subset of the global asset allocation decision and that it is impossible to evaluate the risk of domestic securities without reference to international factors. Investors must be aware of factors driving stock prices and the interaction between movements in stock prices and exchange rates. According to them the financial markets have become very much volatile over the last decade due to the unpredictable speedy changes like oil price shocks, drive towards economic and monetary unification in Europe, the wide scale conversion of communist

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countries to free market policies etc. They emphasized the need for tightly controlled risk management measures to guard against the unpredictable behavior of financial markets. Rajagopal (1996) commented on risk management in relation to banks. He opined that proper risk management is good banking. A professional approach to risk management will safeguard the interests of the banking institution in the long run. He described risk identification as an art of combining intuition with formal information. And risk measurement is the estimation of the size, probability and timing of a potential loss under various scenarios. Ghose (1998) reviewed VAR (value at risk). There are two steps in measuring market risk, the first step is computation of the dear, (the daily earning at risk) the second step is the computation of the var. He also reviewed the measurement of price sensitivity. He stated that price sensitivity could be measured by modified duration (MD) or by cash flow approach. Ghosh (1998) reviewed the various types of risks in relation to the different institutions. He opined that 'managing risk' had different meanings for banks, financial institutions, and nonbanking financial companies and manufacturing companies. In the case of manufacturing companies, the risk is traditionally classified as business risk and financial risk. Banks, financial institutions and nonbanking financial companies were prone to various types of risks; important ones are interest rate risk, market risk, foreign exchange risk, liquidity risk, country and sovereign risk and insolvency risk. Suseela (1998) commented on the risk management processes of banks. She revealed that banks need to do proper risk identification, classify risks and develop the necessary technical and managerial expertise to assume risks. Embracing scientific risk management practices will not only improve the profits and credit management processes of banks, but will also enable them to nurture and develop mutually beneficial relationships with customers. She concluded that the better the risk information and control system the more risk a bank can assume prudently and profitably. Terry (1998) discussed the nature of the risks associated with derivative instruments, measure met of those risks and manage them. He stated that risk is the quantified uncertainty regarding the undesirable change in the value of a financial commitment. He opined that an organization using derivatives would be exposed to risks from a number of sources, which are identified as market risk, credit risk, operational risk and legal risk. He revealed that there is 'systemic risk' that the default by one market participant will precipitate a failure among many participants because of the interrelationship between the participants. Akash (1999) reviewed the utility of derivatives in reducing risks. He opined that derivatives allow an investor to hedge or reduce risks. But they tend to confound investors due to their esoteric nature. The leverage that the derivatives offer to any trader, investor or speculator is tremendous. By the use of derivatives the volatility of the market

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also gets neutralized. He concluded the article by stating that while the discerning one stands to gain from it, a person who fails to read it right could land up burning his fingers. Juan (1999) commented on the models of measuring risks. He opined that the models of measuring risk are only as good as the assumptions underlying them. They are not realities, but models. Commenting on default risk in India, he stated that many defaults are not reported. He was of the opinion that default risks are not handled properly. Suresh (1999) emphasized the need for risk management in the securities market with particular emphasis on the price risk. He commented that the securities market is a 'vicious animal' and there is more than a fair chance that far from improving, the situation could deteriorate Seema (1999) disclosed the changing face of risk by comparing the old paradigm and the new paradigm. The old paradigm is that risk assessment is an ad-hoc activity that is done whenever managers believe there is a need to do it. But the new paradigm is that risk assessment is a continuous activity. The old pattern of risk management was to inspect and detect business risk and then react. But the new pattern is to anticipate and prevent business risk at the source and then monitor business risk controls continuously. She distinguished between business risks and financial risks. In managing the business risk, one looks at the risk reward profile to maximize reward based on the risk appetite. She opined that one can run a business by minimizing financial risk, but the business risk itself could be high. She clears the air by stating that business risk is technology risk, political risk, geography risk, the changing preference of customers, economic risk, etc. Whereas financial risk is currency risk, interest rate risk, commodities risk etc. To manage these risks, the first step is to identify the risks and determine the source of those risks. There is no way to manage something that cannot be measured, so the next step involves getting a measure of the significance and likelihood of occurrence. She concluded by emphasizing the need to prioritize the risks, as it is impossible to throw resources on all kinds of risks. Charls (2000) revealed very practical, authoritative and easy-to-follow tips and suggestions for good investment in the stock market. According to him growth is the heart of successful investment. He suggested that before investing, one should be clear about the goal. He opined that the biggest risk is not in investing but in doing nothing and watching inflation eating away the savings. Avery useful suggestion of the author is not to draw upon the income from investment but to reinvest it. A low risk approach will yield low return. So the author urged the investor to be aggressive, subject to his personal limits. Crisil report on risk management (2000) stated that the loss potential from market risk will increase in the absence of strong risk management tools. The banks which adopt a pro-active approach to upgrading risk management skills which are currently unsophisticated as compared to internationally best practices, would have a competitive

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edge in future. The report commented that in the increasingly deregulated and competitive environment, the risk management strategies of banks would hold the key to differentiation in their credit worthiness. Jayanth (2000) disclosed the implications of derivatives. The use of derivatives can be for safeguarding oneself against risks. It is widely recognized by all including the SEB committee on derivatives that a substantial degree of speculative activity in a market for derivatives is necessary and without this, a good market in derivatives cannot function. He revealed that the basic purpose of providing a system for trading in derivatives is to enable a person to protect himself against the risk of fluctuations in the market prices. This is known as hedging. But he argued that it might lead to the bankruptcy of the grantor of an option to buy as he takes a huge risk since the price could go upward to an unlimited extent and still he would have to deliver the shares. This is one of the important reasons that the derivatives are criticised. He concluded the article by suggesting that the objective of the regulator would be to provide protection to all concerned. Mitra (2000) commented on the increasing volatility of the bourses, which forces an investor to shift away from the equity market. He observed that analysts profess to the investors the virtue of long-term time horizon for the equity investment. But sharp volatility has become a feature of the capital market worldwide, resulting in frequent, sharp, downward corrections. In this scenario it is proving difficult to convince the investors to think long-term. He opined that the risk of obsolescence and failure have increased enormously in the highly valued economy companies, resulting in huge loss on investments. Investors with long outlook are real losers in this new paradigm of stock market gambles. He argued that, in this scenario, investors are shifting away from the equity market to cash and debt. Long-term vision in the equity investments has given way to short term trading. Raghavan (2000) reviewed the need for a risk management system, which should be a daily practice in banks. He opined that bank management should take upon in serious terms, risk management systems, which should be a daily practice in their operations. He is very much sure that the task is of very high magnitude, the commitment to the exercise should be visible and failure may be suicidal as we are exposed to market risks at international level, which is not under our control as it was in the insulated economy till sometime back. Raghavan (2000) commented on the risk perceptions and the risk measure parameters. He opined that risk measures are related to the return measurements. While risks can only be contained and cannot be eliminated altogether, there is no doubt that some risks have to be taken to get adequate returns. Returns can be increased or made quicker by taking more financial and operating risks. But the environmental risks typically do not increase returns but serve as constraints on return and risk decisions. They concluded that the process of retaining the levels of risks within the desirable levels must be practiced in the daily operations.

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Rajagopala et al. (2000) revealed the various risks experienced by investors in corporate securities and the measures adopted for reducing risks. They opined that calculated risk might reduce the intensity of loss of investing in corporate securities. As per their study, many investors are holding shares of those companies that are nonexistent at present. They opined that investors may accept risks inherent in equity, but they may not be willing to reconcile to the risk of fraud. Promoters should not be allowed to loot the genuine investors by their fraudulent acts. They observed that political uncertainties and frequent changes in the government have put the investors follow the policy of 'wait and watch' the political situation before making an investment decision. Suresh et al. (2000) emphasized the need for a greater consciousness of the risks attached to fixed income securities portfolio, as the market in a situation of crunch can suddenly turn illiquid. Some concrete steps to put in place a mechanism to evaluate and seek to control the market risk would be necessary. They opined that the pursuit of profits often leads to a degree of recklessness that conveniently disregards the direct correlation between risk and profits. They concluded that a risk management mechanism could be looked as a tool to instill discipline in any trading activity. It is a surveillance tool for constant monitoring of the market prices so as to forewarn against the unacceptable levels of risk on positions maintained. Vijay (2000) revealed the risks faced by banks and financial institutions and the degree of risk faced by them. According to him, risk management is gathering momentum at a time when there is increasing pressure on banks and f.1.s to better manage their assets and improve their balance sheet. He opined that the greater the volatility of expected returns, the higher is the risk. The essence of risk management is to reduce the volatility. Report by the IES (the investigation enforcement and surveillance), Sebi (2000) states that in spite of some instances of high volatility, the Indian markets have remained stable and safe. It is observed that the Indian securities market has been witnessing a downtrend and instances of volatility. But the downtrend and the fall in the sensex are in consonance with the fall in the indices of the major capital markets around the world. According to the report, the downtrend in the sensex could be attributed to1. Rise in the oil prices in the global markets leading to increase in oil pool deficit. 2. Downward pressure on the Indian rupee. 3. Fears of economic slowdown as indicated by the key economy indicators. 4. Revival of competitive economies such as Malaysia and possibility of shifting some foreign investments to these countries etc. The report concluded that the risk containment measures along with the proactive measures taken by the SEBI from time to time has ensured that the level of safety remained adequate and there were no constraints on the settlement process. Ajay (2001) evaluated the implications of 'equity risk premium'. He opined that investors look for a certain level of return for assuming the 'risk of equities volatile return'. This level can be measured through the equity risk premium. Equity risk premium is the sum of the dividend yield and earnings growth less current bond annual yield. He Performance of FMCG Companies of Indian Stock Market

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observed that the risk premium rose very sharply towards the end of the last decade. The expectations of the earnings growth had moved up dramatically since 1998. But in the last year we saw a fall of the long-term growth expectations. He opined that a downturn is associated with a fall in the profitability of the corporate sector. He argued that the equity investments are not for the weak hearted, as the equity holders cannot escape the impact of the movements in the capital market. We are headed for a period of lower returns to the investors. He concluded that the scaling down of the return expectations would reduce the chances of wild swings. And this would be better for the health of the bruised equity investors. Gerela et al. (2001) reviewed the risk management system at the Bombay stock exchange. They reported that the BSE has strengthened the risk management measures to maintain the market integrity. The introduction of the modified carry forward system, coupled with the bolt (Bombay online trade) expansion to cities all over India has led to a significant increase in the liquidity and volumes at the exchange. As a consequence, the risk management function at the BSE has assumed greater importance. In order to maintain the market integrity and to avert payment defaults by the members, the exchange has strengthened its risk management system by taking the following measures: 1. All members are required to maintain the base minimum capital of rs.10 lakh with the exchange. 2. As a risk management measure the exchange places trading Restrictions on the members. 3. The exchange has prescribed a ceiling on the gross exposure of the members. 4. The exchange collects from the members, daily margin, additional volatility margin, incremental carry forward margin, etc. 5. The exchange has constituted a risk management committee to put In place a long-term risk management policy. Melwyn (2001) reviewed the various risks to which the Indian corporate are exposed to and also the corporate risk management policies. He opined that the corporate need to focus on their primary business risks and hedge risks arising from commodity price movements. An appropriate level of risk for a corporate is dependent on how much business and financial risk it is exposed to. A corporate with volatile cash flows and high operational risk may find it appropriate to take on less market risks. A corporate who is exposed to a relatively lower business risk may feel more comfortable in taking on more unhedged financial risk. Ultimately, the corporate may decide to fix the total risk appropriate to it as some percentage of its capita1 base or the expected earnings. He opined that the corporate, despite their unlimited life span have limited tolerance to price volatility. The commodity price exposure should be fully hedged because corporate face enough business risk and cannot afford to add further risks. Since all corporate are exposed to commodity price risk, they should maintain a board approved policy and procedures that outline its risk management strategy. He concluded the article

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by stating that the underlying objective in any risk management policy should meet the aspirations of the equity holders. The economic times investors (2001) commented on the "paperless world and described what makes dematerialization the preferred choice and how it reduces risk. The dematerialized trading was introduced in india in 1996 to reduce pains and risks in settlement through the loss of share certificates in transit, bad deliveries, delays in transfer and forged/fake/stolen certificates. It helps in doing away with the risk of loss in transit by directly crediting the account with bonus shares and rights. There is no risk of bad delivery because the ownership status is clearly captured in the depository's computers. Rukmani Viswanath (2001) reported that the primary dealers in govt. Securities are working on a new internal risk management model suited for the Indian market conditions. The attempt is to lay down general parameters for risk perception. The primary dealers association of India is formulating a set of prudential norms for 'risk management practices'. While internationally the principles of risk management may be the same everywhere, the association is of the view that they have to identify the relevant issues and apply those principles in the Indian context. It strongly argues that it must work on a model that can help to manage liquidity and interest rate risk. While the existing RBI guidelines on risk management cover mainly statutory risk, the PDAI hopes that its new risk management model will be able to perceive 'real risk'. These new norms are expected to help gauge several issues like, whether a fall in the prices of securities or yields is a temporary or permanent situation etc. The areas the new norms are likely to address are the assessment of the liquidity situation and envisaging investor appetite for a specific instrument and their appetite for risk. According to the govt. Securities dealers, these norms are expected to help them hedge their risks better. The primary dealers are looking forward to these norms to help them manage their internal risks. The review of literature reveals that recently no study has been undertaken on risk management in investment in corporate securities. Scholars have contributed much to the theories related to risks like risk return relationship, expected value, risk and uncertainty, attitude towards risk, EVA (economic value added) etc. But there is lack of studies on the objectives behind investment in corporate securities, the types of shares that the investors like to invest in, the precautions they take against risks, how they manage a crisis while operating in securities market, the gender differences in handling risks, etc. From the review of literature it is obvious that emotions rule the market, but whether emotional buying and selling are influenced by factors like experience in the stock market operations remains to be answered. Though it is generally accepted that fund is diverted from the stock market to other avenues of investment, studies are to be conducted to reveal whether funds are diverted or not and the reasons for diverting the funds and whether funds are diverted both from the primary market and secondary market etc. The effect of volatility on diversion of funds is also to be enquired into. Investors select a particular type of share like growth share, income share etc. According to their preferences, but the question whether experience in stock market operations has any influence on the type of share they select is to be explored. The review of literature has

Performance of FMCG Companies of Indian Stock Market

22

brought to light that there exists wild speculation in Indian stock markets. But whether speculation leads to diverting funds from the stock market or not raises a big question mark. There are theories like the fundamental analysis, technical analysis etc., to evaluate the securities. To what extent these theories are applied is another question to be resolved. Keeping in mind, these unresolved, inadequately explained and insufficiently explored issues; the present study has been undertaken.

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CHAPTER III

METHODOLOGY Designing of proper methodology is important to carry out a systemic analysis of any research problem. The description of database, and the analytical tools employed in the study are presented in this chapter. The particular are described under the following sub headings. 3.1 Nature and sources of data 3.2 Analytical tools used

3.1 Nature and source of Data The study is based on the secondary source of data. The detailed information required for the study was collected from secondary source in order to accomplish the various objective of the study. Data on 44 FMCG companies listed in Indian stock market were collected from website www.equitymaster.com. The list of companies indicated in appendix-II and the data pertaining to various financial activities of the companies was obtained from published annual accounts and balance sheet of the companies from www.moneycontrol.com and other related sources (BSE and NSE). It may be mentioned here that both abridged final accounts and balance sheet displayed by each companies in www.moneycontrol.com is used for the analysis. Secondary data on various sub components of final accounts and balance sheet of all the 44 FMCG companies listed in equitymaster.com were collected from the web site called moneycontrol.com for the financial year 2008-09 to 2012-13. For analyzing the financial performance of the each individual company as well as overall financial performance of the sector. For identification of factors contributing to financial performance and also to discriminate the factors which influence the financial performance of the companies, the same data was used depending on the requirement of the objectives.

3.2 Analytical tools used The methods of analysis employed in the present study are elaborated under the following headings. 3.2.1 Financial ratio analysis 3.2.2 Factor analysis 3.2.3 Discriminant analysis 3.2.4 Compound annual growth rate 3.2.5 Value at Risk

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3.2.1 Financial ratio analysis Financial ratios are mathematical comparisons of financial statement accounts or categories. These relationships between the financial statement accounts help investors, creditors, and internal company management understand how well a business is performing and areas of needing improvement. Financial ratios are the most common and widespread tools used to analyze a business financial standing. Ratios are easy to understand and simple to compute. They can also be used to compare different companies in different industries. Since a ratio is simply a mathematically comparison based on proportions, big and small companies can be use ratios to compare their financial information. In a sense, financial ratios don't take into consideration the size of a company or the industry. Ratios are just a raw computation of financial position and performance. Ratios allow us to compare companies across industries, big and small, to identify their strengths and weaknesses. Financial ratios are often divided up into six main categories: liquidity, solvency, efficiency, profitability, market prospect, investment leverage, and coverage. The secondary data drawn from the audited annual statements of the balance sheet and profit and loss account of the FMCG companies for the period of five years 2008-09 to 2012-13 were subjected to financial ratio analysis. 3.2.1.1 Leverage Ratios The company‟s current debt paying ability and company‟s long term financial strengths are judged through financial leverage, or capital provided by owners and lenders. As a general rule, there has to be a proper blend of debts and owners equity. Leverage ratios are calculated by profit and loss items by determining the extent to which operating profits are sufficient to cover the fixed charges. A. Debt ratio This is employed to measure the long term solvency of the firm. To know the proportion of the interest bearing debts (also called funded debt) in the capital structure. Debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company‟s assets that are financed by debt. Total Debt Debt ratio = Total Assets The higher the ratio, the more leveraged the company and the greater its financial risk. Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries like technology. In the consumer lending and mortgage businesses, debt ratio is defined as the ratio of total debt service obligations to gross annual income.

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B. Debt equity ratio Debt equity ratio shows the relative claims of creditors (Outsiders) and owners (Interest) against the assets of the firm. Thus this ratio indicates the relative proportions of debt and equity in financing the firm‟s assets. It can be calculated by dividing outsider funds (Debt) by shareholder funds (Equity) Debt equity ratio =

Outsider funds (Total Debts) Shareholder funds or Equity

The outsider fund includes long-term debts as well as current liabilities. The shareholder funds include equity share capital, preference share capital, reserves and surplus including accumulated profits. However fictitious assets like accumulated deferred expenses etc should be deducted from the total of these items to shareholder funds. The shareholder funds so calculated are known as net worth of the business. C. Proprietary (equity) ratio This ratio indicates the proportion of total assets financed by owners. calculated by dividing proprietor (Shareholder) funds by total assets. Proprietary (equity) ratio =

It is

Shareholder funds Total assets

D. Fixed assets to net worth ratio This ratio establishes the relationship between fixed assets and shareholder funds. It is calculated by dividing fixed assets by shareholder funds. Fixed assets to net worth ratio =

Fixed asset Net worth

The shareholder funds include equity share capital, preference share capital, reserves and surplus including accumulated profits. However fictitious assets like accumulated deferred expenses etc should be deducted from the total of these items to shareholder funds. The shareholder funds so calculated are known as net worth of the business. E. Fixed assets to long term funds ratio Fixed assets to long term funds ratio establishes the relationship between fixed assets and long-term funds and is calculated by dividing fixed assets by long term funds. Fixed assets to long term funds ratio =

Performance of FMCG Companies of Indian Stock Market

Fixed asset Long-term funds

X 100

26

F. Interest coverage ratio This shows the number of times the earnings of the firms are able to cover the fixed interest liability of the firm. This ratio therefore is also known as Interest coverage or time interest earned ratio. It is calculated by dividing the earnings before interest and tax (EBIT) by interest charges on loans. Debt service ratio =

Earnings before interest and tax (EBIT) Interest charges

3.2.1.2 Liquidity ratios It measures the ability of the firm to meet its short-term obligations that is capacity of the firm to pay its current liabilities as and when they fall due. Thus these ratios reflect the short-term financial solvency of a firm. A firm should ensure that it does not suffer from lack of liquidity. The failure to meet obligations on due time may result in bad credit image, loss of creditors confidence, and even in legal proceedings against the firm on the other hand very high degree of liquidity is also not desirable since it would imply that funds are idle and earn nothing. So therefore it is necessary to strike a proper balance between liquidity and lack of liquidity. A. Current ratio The current ratio measures the short-term solvency of the firm. It establishes the relationship between current assets and current liabilities. It is calculated by dividing current assets by current liabilities. Current asset Current ratio = Current liabilities Current assets include cash and bank balances, marketable securities, inventory, and debtors, excluding provisions for bad debts and doubtful debtors, bills receivables and prepaid expenses. Current liabilities includes sundry creditors, bills payable, shortterm loans, income-tax liability, accrued expenses and dividends payable. B. Acid test ratio / quick ratio It has been an important indicator of the firm‟s liquidity position and is used as a complementary ratio to the current ratio. It establishes the relationship between quick assets and current liabilities. It is calculated by dividing quick assets by the current liabilities. Acid test ratio =

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Quick asset Current liabilities

Bindiya, K.

Quick assets are those current assets, which can be converted into cash immediately or within reasonable short time without a loss of value. These include cash and bank balances, sundry debtors, bill‟s receivables and short-term marketable securities. C. Absolute liquid ratio / cash ratio It shows the relationship between absolute liquid or super quick current assets and liabilities. Absolute liquid assets include cash, bank balances, and marketable securities. Absolute liquid ratio =

Quick asset Current liabilities

3.2.1.3 Profitability ratios Profitability ratios measure a company‟s ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed. Profitability ratios include return on sales, return on investment, return on equity, return on capital employed (ROCE), cash return on capital invested (CROCI), gross profit margin and net profit margin. All of these ratios indicate how well a company is performing at generating profits or revenues relative to a certain metric. Different profitability ratios provide different useful insights into the financial health and performance of a company. For example, gross profit and net profit ratios tell how well the company is managing its expenses. Return on capital employed (ROCE) tells how well the company is using capital employed to generate returns. Return on investment tells whether the company is generating enough profits for its shareholders. The profitability ratio of the firm can be measured by calculating various profitability ratios. General two groups of profitability ratios are calculated. A. Profitability in relation to sales: net profit margin B. Profitability in relation to investments A.1 Gross profit margin or ratio It measures the relationship between gross profit and sales. It is calculated by dividing gross profit by sales. Gross profit margin or ratio =

Gross profit Net sales

X 100

Gross profit is the difference between sales and cost of goods sold.

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A.2 Net profit margin or ratio It measures the relationship between net profit and sales of a firm. It indicates management‟s efficiency in manufacturing, administrating and selling the products. It is calculated by dividing net profit after tax by sales. Earnings after tax

Net profit margin or ratio =

Net sales

X 100

A.3 Operating profit margin or ratio It establishes the relationship between total operating expenses and net sales. It is calculated by dividing operating expenses by the net sales. Operating expenses

Operating profit margin or ratio =

X 100

Net sales

Operating expenses includes cost of goods produced/sold, general and administrative expenses, selling and distributive expenses. A.4 Expenses ratio This indicate the expenses may be increasing and other may be declining to know the behavior of specific items of expenses the ratio of each individual operating expense to net sales should be calculated. The various variants of expenses are; Cost of goods sold =

Cost of goods sold

Administrative expenses ratio =

Selling % distribution expenses ratio =

Net sales

X 100

Administrative expenses Net sales

X 100

Selling and distribution expenses Net sales

X 100

A.5 Operating profit margin or ratio Operating profit margin or ratio establishes the relationship between operating profit and net sales. It is calculated by dividing operating profit by sales. Operating profit margin or ratio =

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Operating profit Net sales

X 100

Bindiya, K.

Operating profit is the difference between net sales and total operating expenses. (Operating profit = Net sales – cost of goods sold – administrative expenses – selling and distribution expenses.) B.1 Return on gross capital employed This ratio establishes the relationship between net profit and the gross capital employed. The term gross capital employed refers to the total investment made in business. The conventional approach is to divide Earnings after Tax (EAT) by gross capital employed. Return on gross capital employed =

Earnings after Tax (EAT) Gross capital employed

X 100

B.2 Return on net capital employed It is calculated by dividing Earnings before Interest & Tax (EBIT) by the net capital employed. The term net capital employed in the gross capital minus current liabilities. Thus it represents the long-term funds supplied by creditors and owners of the firm. Earnings before interest and Tax Return on net capital employed = X 100 Gross capital employed B.3 Return on share capital employed This ratio establishes the relationship between earnings after taxes and the shareholder investment in the business. This ratio reveals how profitability the owners funds have been utilized by the firm. It is calculated by dividing Earnings after tax (EAT) by shareholder capital employed. Return on share capital employed =

Earnings after tax (EAT) Shareholder capital employed

X 100

B.4 Return on equity share capital employed Equity shareholders are entitled to all the profits remaining after the all outside claims including dividends on preference share capitals are paid in full. The earnings may be distributed to them or retained in the business. Return on equity share capital investments or capital employed establishes the relationship between earnings after tax and preference dividend and equity shareholder investment or capital employed or net worth. It is calculated by dividing earnings after tax and preference dividend by equity shareholder‟s capital employed. Earnings after tax (EAT), Preference dividends Return on share capital = X 100 employed Equity share capital employed

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C. Earnings per share Earnings per share measure the profit available to the equity shareholders on a per share basis. It is computed by dividing earnings available to the equity shareholders by the total number of equity share outstanding. Earnings per share =

Earnings after tax – Preferred dividends Equity share outstanding

X 100

D. Dividend per share The dividends paid to the shareholders on a per share basis in dividend per share. Thus dividend per share is the earnings distributed to the ordinary shareholders divided by the number of ordinary shares outstanding. Dividend per share =

Earnings paid to the ordinary shareholders Number of ordinary shares outstanding

X 100

E. Dividends payout ratio (payout ratio) It measures the relationship between the earnings belonging to the equity shareholders and the dividends paid to them. It shows what percentage shares of the earnings are available for the ordinary shareholders are paid out as dividend to the ordinary shareholders. It can be calculated by dividing the total dividend paid to the equity shareholders by the total earnings available to them or alternatively by dividing dividend per share by earnings per share. Dividend payout =

Total dividend paid to equity share holders Total earnings available to equity share holders

Dividend payout =

Dividend per share Earnings per share

3.2.1.4 Activity ratios/Turnover ratios Turnover ratio measures the number of times a company's inventory is replaced during a given time period. Turnover ratio is calculated as cost of goods sold divided by average inventory during the time period. A high turnover ratio is a sign that the company is producing and selling its goods or services very quickly. Turnover ratios are also known as activity ratios or efficiency ratios with which a firm manages its current assets. The following turnover ratios can be calculated to judge the effectiveness of asset use.

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A. Inventory turnover ratio This ratio indicates the number of times the inventory has been converted into sales during the period. Thus it evaluates the efficiency of the firm in managing its inventory. It is calculated by dividing the cost of goods sold by average inventory. Cost of goods sold

Inventory turnover Ratio =

Average inventory

The average inventory is simple average of the opening and closing balances of inventory (Opening + Closing balances / 2). In certain circumstances opening balance of the inventory may not be known then closing balance of inventory may be considered as average inventory B. Debtor turnover ratio This indicates the number of times average debtors have been converted into cash during a year. It is determined by dividing the net credit sales by average debtors. Debtor turnover ratio =

Net credit sales Average trade debtors

A net credit sale consists of gross credit sales minus sales return. Trade debtor includes sundry debtors and bill‟s receivables. Average trade debtors (Opening + Closing balances / 2) When the information about credit sales, opening and closing balances of trade debtors is not available then the ratio can be calculated by dividing total sales by closing balances of trade debtor. Total Sales Debtor turnover ratio = Trade debtors C. Creditor turnover ratio It indicates the number of times sundry creditors have been paid during a year. It is calculated to judge the requirements of cash for paying sundry creditors. It is calculated by dividing the net credit purchases by average creditors. Creditor turnover ratio =

Net credit purchases Average trade creditor

Net credit purchases consist of gross credit purchases minus purchase return. When the information about credit purchases, opening and closing balances of trade creditors is not available then the ratio is calculated by dividing total purchases by the closing balance of trade creditors.

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D. Assets turnover ratio The relationship between assets and sales is known as assets turnover ratio. Several assets turnover ratios can be calculated depending upon the groups of assets, which are related to sales. D.1 Total asset turnover This ratio shows the firm‟s ability to generate sales from all financial resources committed to total assets. It is calculated by dividing sales by total assets. Total asset turnover =

Total sales Total assets

D.2 Net asset turnover This is calculated by dividing sales by net assets. Net asset turnover =

Total sales Net assets

Net assets represent total assets minus current liabilities. Intangible and fictitious assets like goodwill, patents, accumulated losses, deferred expenditure may be excluded for calculating the net asset turnover. D.3 Fixed asset turnover This ratio is calculated by dividing sales by net fixed assets. Fixed asset turnover =

Total sales Net fixed assets

Net fixed assets represent the cost of fixed assets minus depreciation. D.4 Current asset turnover It is divided by calculating sales by current assets Current asset turnover =

Total sales Current assets

D.5 Net working capital turnover ratio A higher ratio is an indicator of better utilization of current assets and working capital and vice-versa (a lower ratio is an indicator of poor utilization of current assets and working capital). It is calculated by dividing sales by working capital.

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Net working capital turnover ratio =

Total sales Working Capital

Working capital is represented by the difference between current assets and current liabilities. 3.2.1.5 Operating ratios Operating ratio is the ratio of production and administrative expenses to net sales. The measure excludes financing costs, non-operating expenses, and taxes. Essentially, it is the cost per sales dollar of operating a business. A lower operating ratio is a good indicator of operational efficiency, especially when the ratio is low in comparison to the same ratio for competitors and benchmark firms. The operating ratio is only useful for seeing if the core business is able to generate a profit. Since several potentially significant expenses are not included, it is not a good indicator of the overall performance of a business, and so can be misleading when used without any other performance metrics. A. Material cost ratio Material cost ratio is calculated by dividing material consumed by sales. Material cost ratio =

Material consumed Sales

X 100

B. Labour cost ratio Labour cost ratio is calculated by dividing labour cost by sales. Labour cost ratio =

Labour cost Sales

X 100

C. Selling and distribution expense ratio Selling and distribution expense ratio is calculated by dividing selling and distribution expenses by sales. Selling and distribution expense ratio =

Selling and distribution expense Net sales

X 100

3.2.1.6. Market test ratio Market Test Ratios help investor to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. These ratios are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company‟s shares.

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A. Dividend payout ratio It measures the relationship between the earnings belonging to the equity shareholders and the dividends paid to them. It shows what percentage shares of the earnings are available for the ordinary shareholders are paid out as dividend to the ordinary shareholders. It can be calculated by dividing the total dividend paid to the equity shareholders by the total earnings available to them or alternatively by dividing dividend per share by earnings per share. Dividend per share Dividend payout = Earnings per share B. Book value A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most companies. Since book value is a more accurate measure of valuation for companies which aren't growing quickly, book value is of more interest to value investors than growth investors. Book value = total assets - intangible assets - liabilities 3.2.2 Factor analysis Factor analysis is a multivariate technique in which, two most commonly employed factor analytic procedures in marketing applications are principal and common factor analysis. The major objective to employ this analysis is to determine the variables which influence the financial performance of FMCG companies. Principal component analysis can accommodate a large number of variables and reduce the information to a convenient size. The inter-relationship among a set of many inter-related variables are examined and represented in terms of a few underlying factors or dimensions that explains the correlation among a set of variables. This assumes that the observed variables are linear combinations of some underlying source variables, which are known as factors. The factor analysis program uses the correlation matrix as input to identify interrelations between variables. Using those correlations one can see what information and hypotheses can be obtained. Factor loadings provide the correlation between the variable and the underlying dimension. The product of corresponding factor loadings can obtain the correlation between any two variables.

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Since the objective of the factor analysis is to represent each of the variables as linear combination of the smaller set of factors, we can express this as X1= λ11F1+ λ12F2+…+ λ1m Fm+ e1 X2= λ21F1+ λ22F2+…+ λ2m Fm+ e2 … … … … … … … … … … Xn= λn1F1+ λn2F2+…+ λnm Fm+ en Where, X1to Xn=Standardized scores F1-Fn= Standardized factor scores λ11- λnm=Factor loadings e1- en=Error variance The maximum number of factors possible is equal to the number of variables. However, small number of factors by themselves may be sufficient for retaining most of the information on the original variables. Ranking of companies was done based on factor score obtained from the factor analysis and overall weight age was calculated by multiplying individual factor weights with respective factors or dimensions. 3.2.3 Discriminant analysis Discriminant analysis was carried out to find out the variables or factors discriminating the good and poor performance of the FMCG companies listed in Indian stock market. The linear Discriminant function of the following form was used. It involves the determination of a linear equation like regression that will predict which group the case belongs to. The form of the equation or function is: D= V1 X1+ V2 X2+ V3 X3 = ........Vi Xi +a Where D = discriminate function v = the discriminant coefficient or weight for that variable X = respondent‟s score for that variable a = a constant i = the number of predictor variables This function is similar to a regression equation or function. The V‟s are unstandardized discriminant coefficients analogous to the b‟s (Beta) in the regression equation. When V‟s maximize the distance between the means of the criterion (dependent) variable. Standardized discriminant coefficients can also be used like beta weight in regression. Good predictors tend to have large weights i.e. come up with an equation that has strong discriminatory power between groups. After using an existing set of data to calculate the discriminant function and classify cases, any new cases can then be

Performance of FMCG Companies of Indian Stock Market

36

classified. If the number of discriminant functions less there will be fewer groups. There is only one function for the basic two group discriminant analysis. 3.2.4 Compound growth rate For evaluating the growth pattern of FMCG sector. An exponential form of the growth function was used as shown below. Yt = ABt Vt --------------------------------------------- (1) Where, Yt: Growth in the year „t‟ A: Intercept indicating Yt in the base period (t = 0) B: constant ti: time period (i = 1 to 5) Equation (1) was converted into the logarithmic form in order to facilitate the use of linear regression. Taking logarithms on both sides of the equation (1). ln Yt = 1n A + t (1n B) + 1n Vt This was of the following form Qt = a + bt + Ut ------------------------------------- (2) Where, Qt : 1n Yt a : 1n A b : 1n B Ut : 1n Vt The values of „a‟ and „b‟ were estimated by using ordinary least squares Antilogarithms of „a‟ and „b‟ values as A : Anti 1n a B : Anti 1n b Average annual compound growth rate was calculated as B:1+g g : B –1 For the effective comparison, the growth rates worked out with the help of equation (2) were multiplied by 100 to obtain the percentage change in the variable concerned. 3.2.4 Value at Risk Value at Risk used to identify the investment risk in FMCG sector. It indicates the proportion of risk which is involved in different FMCG sector.

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Bindiya, K.

Formula for calculating VaR using the delta-normal method is given below: VaR= alpha*sigma*Exposure Where, Alpha =

standard normal deviation corresponding to the specific confidence level. In excel this is equal to using the NORMSINV function.

Sigma =

The volatility of the underlying asset. There are complex forms of implementing the value at risk model that uses GARCH to forecast future the volatility.

Exposure = This is the exposure to the particular risk factor. Remember that the exposure will need to be converted at the correct exchange rate before VaR can be calculated in cases where the assets are not in the right reporting currency.

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CHAPTER IV

RESULTS The main objective of the study was to analyze the Performance of Fast-Moving Consumer Goods sector of Indian Stock Market. In this chapter, the result of the Study is presented under the following headings: 4.1 To analyze the growth and variability 4.2 To analyze the financial performance 4.3 To analyze investment risk

4.1 To analyze the growth and variability Compound annual growth rate (CAGR) was calculated to analyze the growth factors covering annual growth for the period of five years. CAGR were calculated for 17 companies. Discriminant analysis was used to analyze the factors responsible for good and poor performance of companies. 4.1.1 Growth rate of companies based on percentage The FMCG sector have a great opportunity for growth and development in the country, with the growing population, the rising disposable incomes, education, urbanization, the advent of modern retail and a consumption-driven society. Table 4.1 and Fig 1 presents the year wise growth pattern of FMCG sector, for the period of 2008 -09 to 2012-13. The growth pattern of FMCG sector was analyzed and estimated in terms of percentage. It is clear from the Table 4.1 and Fig.1 indicates that highest growth in Kwality Dairies (176.24%) in the year 2008-09 followed by Usher Agro (68.36%) in the year 2011-12 and the least growth in Kwality Dairies (-153.10%) in the year 2011-12. Table 4.1 and Fig.1 it indicates ITC, Britannia, Colgate Palmolive has growing year by year but it is very surprise to see that low growth in FMCG sector during 201213. Table 4.2 and Fig. 2 presents the cumulative growth pattern of FMCG sector, for the period of five years from 2008 to 2013.It is clear from the Table 4.2 that Tata coffee have a highest growth of about 50.56% followed by Agro tech Foods (36.78%) and Hindustan Foods (36.78%) while Kohinoor Foods (-26.12%) Samaria Agro oils (-15.12%) followed by Modern Dairies (-22.67%) have very low growth rate.

Performance of FMCG Companies of Indian Stock Market

39

Table 4.1: Analysis of Growth pattern in FMCG sector (2008-13) Sl. No.

Company

2008-09 (%)

2009-10 (%)

2010-11 (%)

2011-12 2012-13 (%) (%)

1.

ITC

3.70

16.59

14.09

15.05

0.02

2.

Nestle

4.94

24.36

23.18

6.51

0.01

3.

Britannia

14.64

2.07

-17.79

14.09

0.02

4.

Tata Coffee

-11.39

33.50

50.55

4.70

0.06

5.

Ruchi Soya Industries

-74.28

49.02

-17.11

-10.86

-0.04

6.

Agro Tech Foods

-4.85

31.94

20.98

15.40

0.02

7.

Hindustan Foods

-4.85

31.94

20.98

15.40

0.02

8.

Future Retail

-36.04

29.61

-57.76

-51.54

-0.02

9.

Dabur India

19.41

30.15

1.50

0.95

0.02

10.

Colgate Palmolive

22.72

16.65

4.14

14.32

0.02

11.

Mount Everest Mineral Water

-73

4.18

-6.85

9.55

0.04

12.

Kohinoor Foods

-71.52

11.30

-12.47

-40.69

-0.01

13.

Kwality dairy

176.24

120.31

23.83

-153.10

-0.02

14.

Sanwaria Agro Oils

-35.32

-33.04

37.63

38.51

-0.04

15.

Modern dairies

-48.75

45.84

-80.71

2.13

-0.07

16.

Golden Tobacco

-27.87

-65.51

-29.09

34.79

0.09

17.

Usher Agro

-28.34

-91.97

9.96

68.36

0.19

40

Bindiya, K.

200

G 150 r o w t 100 h R 50 a t e

2008-09 2009-10

0

2010-11

(%)

2011-12 2012-13 -50

-100

-150

Growth pattern of FMCG companies -200

Fig. 1: Growth pattern of FMCG companies

Table 4.2: Cumulative Growth pattern of FMCG sector Sl. No.

Company

Growth rate (%)

1.

ITC

29.57

2.

Nestle

28.41

3.

Britannia

10.25

4.

Tata Coffee

50.56

5.

Ruchi Soya Industries

12.34

6.

Agro Tech Foods

36.78

7.

Hindustan Foods

36.78

8.

Future Retail

-12.94

9.

Dabur India

24.68

10.

Colgate Palmolive

27.90

11.

Mount Everest Mineral Water

6.82

12.

Kohinoor Foods

-26.12

13.

Kwality dairy

33.98

14.

Sanwaria Agro Oils

-15.12

15.

Modern dairies

-22.63

16.

Golden Tobacco

26.88

17.

Usher Agro

0.99

Performance of FMCG Companies of Indian Stock Market

41

4.1.2 Factor Discriminating good and poor performing companies Discriminat analysis was employed to distinguish between two groups, in this case companies performing well versus companies performing poorly. Companies were distinguished good and bad based on the overall factor scores obtained in factor analysis. The two groups of companies were demarcated using the estimated Discriminant function. The results are present in Table 4.3. The Table 4.3 also presents the average value of the various ratios of the good and poor performing companies. All the ratios are significantly superior in good performing companies compared to underperforming companies. The Current ratio (13.47), Debt equity ratio (21.98), Debt to capital ratio (85.47), Expense ratio (989.32), Return on gross capital employed (30.43) and Dividend payout ratio (26.84) are the significant factors distinguish good FMCG companies from poor FMCG companies. However Net profit margin ratio, Gross profit margin ratio and Earning per share was the factor which is not significantly contributing to the good performance of the companies.

4.2 To analyze the financial performance The results pertaining to the financial performance of selected 44 FMCG company‟s assessed through various ratios and the same is presented in the Table 4.4 for the financial year of 2008-2009 to 2012-2013. 4.2.1 Leverage Ratio The long term financial performance of the company are judged through financial leverage and these ratios signifies the extent to which operating profits are sufficient to cover the fixed charges .Long term solvency or leverage ratios varies from company to company mainly based on the performance and activities carried out, following ratios were calculated for all the companies in the sector under this category. Fixed asset to network ratio was calculated and showed maximum of 2071.17 per cent for Murali Industries followed by 335.34 per cent for Hatsun Agro Products and the minimum was -1035.05 per cent for Agro Dutch Industries. The ratio for rest of the companies varies between -1035.05 to 335.34. Debt equity ratio was recorded maximum of 30.98 for Murali Industries followed by 13.28 for Koutons Retail India and the minimum was -15.23 for Golden tobacco. The ratio for the rest of the companies varies between -15.23 to 13.28. Fixed asset to long term funds was recorded maximum of 106.43 per cent for Umang dairies followed by 106.21 per cent for Agro Dutch Industries and the minimum was 1.69 per cent for Kothari products. The ratio for the rest of the companies varies between1.69 per cent to 106.21 per cent. Debt service ratio was recorded maximum of 735.55 for Zydus Wellness India followed by 415.26 for Colgate Palmolive and the minimum was -2.59 for Cantabil Retail. The ratio for the rest of the companies varies between -2.59 to 415.26.

42

Bindiya, K.

60

50

40

Growth Rate (%)

30

20 2008-13 10

0

-10

-20

-30

Growth pattern Of FMCG Companies

Fig. 2: Cumulative Growth pattern of FMCG companies

Performance of FMCG Companies of Indian Stock Market

Table 4.3: Factors discriminating financial performance of the good and poor performing companies Sl. No.

Ratio

Discriminant Co-efficient (A)

Poor (X)

Good (Y)

A* (Y-X)

Contribution to Distance

43

1

Current ratio

-5.34

2.36

3.5

6.09

13.47

2

Cash ratio

18.02

0.27

0.58

-5.59

-12.36

3

Inventory turnover ratio

-0.86

7.51

8.48

0.83

1.84

4

Debtor turnover ratio

0.53

9.97

10.67

-0.37

-0.83

5

Total asset turnover ratio

-14.91

2.81

2.61

-2.98

-6.60

6

Fixed asset turnover

-0.17

11.56

18.83

1.24

2.74

7

Current asset turnover

-0.098

58.02

66.47

0.83

1.83

8

Net worth capital turnover ratio

0.57

-7.19

0.55

-4.41

-9.77

9

Debt equity ratio

-6.62

0.52

2.02

9.94

21.98

10

Debt to capital ratio

99.06

0.68

0.29

38.63

85.47

11

Fixed asset to net worth ratio

0.07

-51.09

152.7

-14.91

-32.99

12

Fixed asset to long term funds ratio

0.22

39.46

42.26

-0.61

-1.34

13

Debt service ratio

-0.09

0.71

78.87

7.19

15.88

14

Gross profit margin ratio

3.62

0.4

11.72

-40.96

-90.62

15

Net profit margin ratio

806.07

-0.39

0.1

-394.97

-873.78

16

Expenses ratio

1118

1.23

0.83

447.2

989.32

17

Return on gross capital employed

-0.55

-3.27

21.6

13.76

30.43

18

Return on equity

0.06

42.43

14.56

1.79

3.96

19

Earnings per share ratio

0.64

-0.08

47.63

-30.80

-68.14

20

Dividend payout ratio

-55.15

0.04

0.26

12.13

26.84

4.2.2 Liquidity ratios Liquidity ratio measures the ability of the company to realize value in money or the most liquid of assets. To know the liquidity position current ratio for all the FMCG companies was calculated and results are presented. Current ratio was recorded maximum of 18.42 for Kwality Dairy followed by 16.56 for Sita Shree Food Product and the minimum was -0.55 for Agro Dutch Industries. The ratio for the rest of the companies varies between -0.55 to 16.56. Cash ratio was recorded maximum of 4.06 for Zydus Wellness followed by 1.84 for Amrit Corporation and the minimum was zero for Brandhouse Retail. The ratio for the rest of the companies varies between zeros to 1.84. 4.2.3 Profitability ratios The profitability ratios show the combined effects of liquidity, asset management and debt management on operating results. Profitability varies from company to company, the profitability of the company‟s was assessed through the profitability ratios like Net profit margin ratio, Return on investment, Earning per share (EPS), Return on assets ratio and Return on equity. Net profit margin ratio was recorded maximum 0.52 for Amrit Corporation followed by 0.27 for Zydus Wellness and the minimum was -7.18 Koutons Retail India and for the rest of companies falls between the ranges of 0.27 to -7.18. Gross profit margin ratio was recorded maximum 35.56 per cent for ITC followed by 28.54 for Zydus Wellness and the minimum was recorded -67.40 Koutons Retail India. The ratio for the other companies falls between the ranges of -67.40 to 28.54. Return on gross capital employed was recorded maximum of 102.54 per cent for Colgate Palmolive followed by 75.99 per cent for Umang Dairies and the minimum was 21.40 per cent for Golden Tobacco. The ratio for the rest of the companies varies between -21.40 to 75.99. Return on equity was recorded maximum of 483.72 per cent for Lotus Chocolate Company followed by 304.51 per cent for Golden Tobacco and the minimum was –360.04 per cent for Murali Industries. The ratio for the rest of the companies varies between -360.04 to 304.51. Earnings per share vary between the maximum of 328.29 for Colgate Palmolive followed by 296.20 for Amrit Corporation and the minimum was -111.36 for Murali Industries. The ratio for the rest of the companies varies between -111.36 to 296.20. 4.2.4 Activity ratios/Turnover ratios Activity ratios measures how effectively the company employs its resources and these ratios also involves the comparisons between the level of sales and investment in various accounts like inventories, accounts receivables etc.

44

Bindiya, K.

Inventory turnover ratio was recorded maximum of 31.15 for Kothari Product followed by 28.07 for Zydus Wellness and the minimum was -0.35 for Koutons Retail India. The ratio for the rest of the companies varies between -0.35 to 28.07. Debtor turnover ratio was recorded maximum of 58.51 for Kwality dairies followed by 48.47 for Ajanta Soya and the minimum was 0.04 for Koutons Retail India. The ratio for the rest of the companies varies between 0.04 to 48.47. Current asset turnover ratio was recorded maximum of 291.79 for Murali Industries followed by 286.27 for Natraj Proteins and the minimum was 0.49 for Amrit Corporation. The ratio for the rest of the companies varies between0.49 to 286.27.Fixed asset turnover ratio varies between the maximum of 259.48 for Kothari Product followed by 37.41 for Kwality Dairy and Foods and the minimum was 0.20 for KGN enterprises. The ratio for the rest of the companies varies between 0.20 to 37.41. Total asset turnover ratio varies between the maximum of 9.06 for Britannia Industries followed by 8.25 for Umang Dairies and the minimum was 0.12 for KGN Enterprises. The ratio for the rest of the companies varies between 0.12to 8.25. Net worth capital turnover ratio was recorded maximum of 21.33 for Tata Coffee followed by 15.98 for Divya Jyoti Industries and the minimum was -128.45 for Modern Dairies. The ratio for the rest of the companies varies between 15.98 to -128.45. 4.2.5 Operating ratios Operating ratios is a measure of extend of the operating cost to sales. In this category include expense cost, labour cost and material costs were calculated. Expense ratio was recorded maximum of 6.38 for Koutons Retail India followed by 1.13 for Cantabil Retail India and the minimum was 0.34 for Amrit Corporation. The ratio for the rest of the companies varies between0.34 to 1.13. Admin expense ratio was recorded maximum of 26.78 for Zydus Wellness followed by 16.12 for Dabur India. The ratio for the rest of the companies varies between zeros to 16.12. 4.2.6 Market test ratio Market test ratio is the difference between the Earnings per share and actual dividend paid to the share holders. This ratio mainly depends on the dividend policy of the enterprise. It is important for shareholders since it reflects the share price in the market. Dividend payout ratio was recorded maximum of 0.76 for Colgate Palmolive followed by 0.60 for Sita Shree food product and the minimum was zero for Flex foods. The ratio for the rest of the companies varies between zeros to 0.60. 4.2.7 Rotated Components Matrices of the factor/dimension The rotated factor matrix loadings for identified factors are given in Table 4.5. This helps in identification of the variables that have large loadings on the same factor. That factor was interpreted in terms of variables that load high on it. It can be seen from

Performance of FMCG Companies of Indian Stock Market

45

the Table 4.5 that the five factors contained three, three, four, six and three variables respectively. Factor 1 represented the profitability status of the companies based on the performance. Factor 2 captured the efficiency and the performance of the companies. Factor 3 highly related to liquidity status of the companies. Factor 4 highly related to turnover aspects of the company‟s and factor 5 represented the market status of the companies based on the performance. The loadings of variables on each factor is ranged from -0.97 to 0.97in factor one followed by -0.90 to 0.96 in factor two,0.55 to 0.85 in factor three, -0.63 to 0.92 in factor four and -0.55 to 0.89 in factor five. Overall loadings of variables on their respective factor ranged from 0.94 to 0.97. Based on these factors analysis ranked the FMCG companies as high medium and least performing and they are explained below. 4.2.7.1 Top ten FMCG sector based on factor analysis From this Table 4.6 we can identify that, these companies were the major contributor to the financial performance of the company‟s. From the Table 4.6 it was observed that while Colgate Palmolive ranked high based on factor analysis followed by ITC, Amrit Corporation, Murali Industries, REI Six Ten Retail, Britannia, Kewal Kiran Clothing, Dabur India, Tata Coffee and Flex Foods. 4.2.7.2 Medium performing FMCG sector based on factor analysis Table 4.7 represents the financial performance of the company‟s. From the Table 4.7 we can observed that while Umang Dairies ranked medium performing company based on factor analysis followed by ADF Foods Industries, Kothari Products, Hatsun Agro Products, Shoppers Stop, Kohinoor Foods, and KGN Enterprises etc. 4.2.7.3 Least performing FMCG sector based on factor analysis It is clear from the Table 4.8 these companies represent the least contribution to the financial performance of the company‟s. From the Table 4.8 it was observed that while Vikas Granaries ranked low followed by Anik Industries, Sanwaria Agro Oils, Cantabil Retail India, Divya Jyoti Industries and Ajanta Soya etc. 4.2.8 Ranking of companies based on ratio According to factor analysis ratios are ranked as high, medium and least. From this table 4.9 we can identify that, the Companies having current ratio of 1.57 they ranked high position followed by 4.18 ranked as medium position and 8.69 ranked as least position. The companies having cash ratio 0.4 ranked as high position followed by 0.51 ranked as medium and 0.24 ranked as least position. For the remaining ratios, all the values are mentioned in Table 4.9.

46

Bindiya, K.

Performance of FMCG Companies of Indian Stock Market

Table 4.4: Analysis of Financial performance of FMCG companies Sl. No.

47

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Companies Colgate Palmolive India) ITC Amrit Corporation Murli Industries. REI Six Ten Retail Britannia Industries Kewal Kiran Clothing Dabur India Tata Coffee Flex Foods Umang Dairies ADF Foods Industries Kothari Products Hatsun Agro Products Shoppers Stop Kohinoor Foods KGN Enterprises V-Mart Retail Kwality Dairy (India) Trent Zydus Wellness Natraj Proteins

Current Ratio

Cash Ratio

0.11 0.14 3.57 2.66 0.50 -0.38 5.52 0.52 1.24 1.70 -0.06 5.04 0.25 0.06 0.36 6.71 14.88 1.69 18.42 3.78 2.75 9.36

0.53 0.02 1.84 0.02 0.01 0.04 0.78 0.38 0.03 0.38 0.17 1.57 0.60 0.06 0.02 0.08 0.28 0.05 0.21 1.74 4.06 0.12

Inventory Turnover Ratio 9.91 2.89 4.02 4.95 4.89 12.29 7.17 5.98 3.24 4.29 9.51 5.45 31.15 10.97 8.37 1.16 1.81 3.11 22.94 4.93 28.07 3.62

Total Asset Fixed Current Debtor Asset Asset Turnover Turnover Ratio Ratio Turnover Turnover 4.75 6.17 10.57 7.53 4.26 1.33 2.76 3.89 17.31 0.39 5.52 0.49 7.05 0.79 1.23 291.79 3.68 4.12 9.07 285.60 5.70 9.06 13.10 10.80 10.60 1.26 6.96 5.53 5.50 2.38 6.42 4.62 5.41 1.02 2.21 3.42 4.42 0.80 1.21 10.51 5.97 8.25 7.76 34.14 10.14 0.76 2.54 1.82 1.56 4.39 259.48 2.24 9.04 4.21 4.44 157.67 5.52 2.32 4.88 7.01 9.00 0.82 15.64 8.51 15.53 0.12 0.20 16.84 8.38 2.98 8.40 145.29 58.51 2.88 37.41 232.04 6.16 0.52 2.90 0.84 8.00 1.36 4.81 1.45 34.54 3.21 24.28 286.27

Net Working Capital -522.48 -5232.95 26.90 264.34 -80.55 -1222.10 134.41 -336.16 23.76 8.89 -26.87 47.19 -1615.64 -172.65 -245.85 829.93 17.07 24.57 723.63 429.65 54.97 52.91

48 Bindiya, K.

Sl. No.

Companies

Current Ratio

Cash Ratio

23. 24. 25. 26 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Jvl Agro Industries Sita Shree Food Products Brandhouse Retails Freshtrop Fruits Tasty Bite Eatables Heritage Foods (India) LT Foods KLRF Ruchi Soya Industries Vimal Oils And Foods Vikas Granaries Anik Industries Sanwaria Agro Oils Cantabil Retail India Divya Jyoti Industries Ajanta Soya Modern Dairies Agro Dutch Industries Golden Tobacco Lotus Chocolate Company Flex Foods Koutons Retail India

0.29 16.56 0.79 0.55 0.75 -0.04 5.51 1.92 0.68 1.68 1.24 0.90 2.41 4.26 2.10 4.69 0.84 -0.55 0.47 2.89 1.70 1.60

0.40 0.45 0.00 0.08 0.38 0.18 0.19 0.04 0.41 0.18 0.80 0.36 0.31 0.11 0.10 1.42 0.11 0.01 0.02 0.06 0.38 0.01

Inventory Turnover Ratio 6.66 7.46 3.61 2.57 11.53 14.87 1.76 5.10 7.09 11.61 2.95 11.05 5.10 1.42 16.00 25.42 9.80 1.79 0.90 10.73 4.29 0.35

Total Asset Fixed Current Debtor Asset Asset Turnover Turnover Ratio Ratio Turnover Turnover 3.61 5.91 19.50 8.56 34.74 1.57 17.47 48.38 2.88 2.95 29.74 26.86 2.65 1.11 1.49 31.52 5.16 1.89 2.68 13.38 8.72 5.97 6.05 44.79 7.36 1.01 5.53 12.09 10.49 2.64 5.62 254.18 4.57 3.83 11.09 9.96 7.51 3.97 35.08 41.98 2.69 0.50 0.71 3.33 3.66 2.94 13.78 8.59 7.68 2.31 11.31 20.83 4.47 1.08 8.75 8.73 17.69 5.06 12.83 183.99 48.47 7.08 35.92 27.26 21.63 4.42 5.37 196.51 0.52 0.75 0.71 95.49 0.30 0.54 2.81 6.03 14.60 3.27 14.20 142.33 4.42 0.80 1.21 10.51 0.04 0.21 2.06 33.59

Net Working Capital -598.39 62.22 -55.81 -11.24 -4.00 -172.37 601.36 17.59 -1870.52 112.55 10.48 -44.07 279.23 80.27 18.42 28.21 -3.84 -454.46 -112.66 7.10 8.89 270.91

Performance of FMCG Companies of Indian Stock Market

Table 4.4: Analysis of Financial performance of FMCG companies Sl. No.

49

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Company Colgate Palmolive (India) ITC Amrit Corporation Murli Industries REI Six Ten Retail Britannia Industries Kewal Kiran Clothing Dabur India Tata Coffee Flex Foods Umang Dairies ADF Foods Industries Kothari Products Hatsun Agro Products Shoppers Stop Kohinoor Foods KGN Enterprises V-Mart Retail Kwality Dairy (India) Trent Zydus Wellness Natraj Proteins

Net Working Capital Turnover Ratio -5.14 -4.79 2.01 4.28 -7.62 -4.06 2.25 -11.18 21.33 5.68 -5.59 2.38 -2.04 -9.29 -8.28 1.16 0.50 11.47 3.31 1.91 4.61 4.17

Debt Equity Ratio 0.00 0.00 0.03 30.98 0.00 0.05 0.07 0.21 0.09 0.28 0.93 0.13 0.18 2.54 0.33 2.29 0.84 0.73 3.62 0.18 0.01 2.64

Debt to Capital Ratio 0.00 0.00 0.03 0.97 0.00 0.05 0.06 0.17 0.08 0.22 0.39 0.11 0.15 0.72 0.25 0.70 0.45 0.42 0.78 0.15 0.01 0.73

Fixed Asset to Net worth Ratio (%) 58.43 48.46 7.36 2071.17 45.54 72.90 19.26 44.91 50.11 84.24 173.57 33.74 2.00 335.34 63.30 17.26 106.00 61.41 35.63 20.95 28.24 48.04

Fixed Asset To Long Term Funds Ratio (%) 58.43 48.25 7.12 64.76 45.42 69.15 18.06 37.12 46 65.78 106.42 29.99 1.69 94.81 47.49 5.25 57.88 35.45 7.7056 17.79 28.24 13.21

Debt Service Ratio 415.25 110.27 97.59 -1.79 68.46 7.68 34.23 48.76 15.96 6.99 67.43 17.64 8.55 1.92 0.66 2.58 155 3.29 1.53 7.85 735.54 1.60

50 Sl. No.

Bindiya, K.

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Company JVL Agro Industries Sita Shree Food Products Brandhouse Retails Freshtrop Fruits Tasty Bite Eatables Heritage Foods (India) LT Foods KLRF Ruchi Soya Industries Vimal Oils and Foods Vikas Granaries Anik Industries Sanwaria Agro Oils Cantabil Retail India Divya Jyoti Industries Ajanta Soya Modern Dairies Agro Dutch Industries Golden Tobacco Lotus Chocolate Company Flex Foods Koutons Retail India

Net Working Capital Turnover Ratio -4.94 2.29 -14.04 -5.44 -20.61 -8.08 1.64 11.56 -13.90 11.09 10.96 -36.48 5.06 1.99 15.98 13.10 -128.45 -0.40 -0.66 7.82 5.68 0.61

Debt Equity Ratio 0.59 0.87 0.75 0.62 0.80 1.51 3.49 2.55 2.08 3.65 1.69 1.39 1.60 0.32 2.48 1.52 -6.66 -4.10 -15.23 -2.22 0.28 13.28

Debt to Capital Ratio 0.35 0.47 0.43 0.38 0.44 0.60 0.78 0.72 0.68 0.75 0.63 0.58 0.62 0.24 0.71 0.60 1.18 1.10 1.07 1.02 0.22 0.93

Fixed Asset to Net worth Ratio (%) 46.66 16.81 17.38 121.23 125.81 247.25 82.06 166.70 106.26 44.80 188.45 50.94 53.12 16.32 137.20 49.59 -466.02 -1035.05 -275.68 -909.30 84.24 142.63

Fixed Asset To Long Term Funds Ratio (%) 30.27 8.96 9.91 74.93 70.59 98.61 18.29 47 34.51 11.31 69.96 21.30 20.43 12.39 39.42 19.70 82.36 106.21 19.37 23.08 65.78 9.98

Debt Service Ratio 3.79 0.65 0.84 1.16 3.86 1.76 0.32 0.16 0.70 0.72 7.77 0.37 0.43 -2.59 0.49 0.63 -0.80 -0.96 -1.23 -0.95 6.99 -2.18

Performance of FMCG Companies of Indian Stock Market

Table 4.4: Analysis of Financial performance of FMCG companies

51

Sl. No.

Company

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Colgate Palmolive (India) ITC Amrit Corporation Murli Industries REI Six Ten Retail Britannia Industries Kewal Kiran Clothing Dabur India Tata Coffee Flex Foods Umang Dairies ADF Foods Industries Kothari Products Hatsun Agro Products Shoppers Stop Kohinoor Foods KGN Enterprises V-Mart Retail Kwality Dairy (India) Trent Zydus Wellness Natraj Proteins

Gross Profit Margin Ratio (%) 21.523 35.559 4.805 -9.008 1.459 5.479 24.258 17.554 22.716 17.337 10.345 18.217 2.121 6.806 15.793 2.105 6.636 10.239 6.898 -1.564 28.542 4.455

Net Profit Margin Ratio 0.160 0.237 0.524 -0.143 0.001 0.037 0.165 0.121 0.150 0.075 0.091 0.098 0.016 0.016 0.030 0.140 0.063 0.037 0.037 0.050 0.270 0.016

Return on Return Earnings Admin Expense Expense Gross Capital on Per Ratio Equity Share Ratio Employed (%) (%) (%) Ratio 0.774 -0.001 102.543 102.545 328.28 0.628 10.727 32.655 32.793 78.81 0.337 0.000 69.064 71.296 296.19 1.090 3.685 -11.258 -360.045 -111.35 0.985 0.000 0.215 0.215 0.10 0.934 0.000 34.065 35.909 78.16 0.731 13.777 21.686 23.117 42.28 0.826 16.116 29.383 35.544 26.59 0.764 5.818 15.832 17.244 42.21 0.795 0.000 6.613 8.467 3.36 0.896 0.000 75.989 123.925 12.57 0.805 0.000 7.890 8.877 5.65 0.974 0.000 6.994 8.253 79.41 0.932 0.000 6.982 24.696 24.69 0.839 12.125 7.322 9.759 15.56 0.752 0.000 15.663 51.467 65.00 0.918 0.000 1.631 2.986 0.59 0.903 0.000 11.664 20.201 15.04 0.932 0.000 10.954 50.643 44.77 0.928 0.000 2.965 3.491 17.34 0.677 26.776 36.220 36.220 17.32 0.954 0.000 5.152 18.730 9.44

Dividend Payout Ratio 0.761 0.571 0.081 0.000 0.000 0.544 0.402 0.489 0.260 0.596 0.000 0.261 0.189 0.378 0.096 0.000 0.083 0.000 0.022 0.375 0.289 0.000

52 Bindiya, K.

Sl. No.

Company

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

JVL Agro Industries Sita Shree Food Products Brandhouse Retails Freshtrop Fruits Tasty Bite Eatables Heritage Foods (India) LT Foods KLRF Ruchi Soya Industries Vimal Oils and Foods Vikas Granaries Anik Industries Sanwaria Agro Oils Cantabil Retail India Divya Jyoti Industries Ajanta Soya Modern Dairies Agro Dutch Industries Golden Tobacco Lotus Chocolate Company Flex Foods Koutons Retail India

Gross Profit Margin Ratio (%) 2.500 2.578 6.998 8.145 6.198 3.679 11.290 4.962 2.551 2.236 14.972 1.781 4.349 -10.133 3.251 0.988 0.503 17.023 -7.960 -0.180 17.337 -67.405

Net Profit Margin Ratio 0.019 0.007 0.011 0.008 0.020 0.006 0.005 -0.011 0.005 0.005 0.044 0.008 0.011 -0.231 0.004 0.001 -0.036 -0.315 -0.448 -0.038 0.075 -7.180

Return on Return Earnings Admin Expense Expense Gross Capital on Per Ratio Equity Share Ratio Employed (%) (%) (%) Ratio 0.966 0.000 11.356 17.501 40.52 0.963 0.000 1.087 2.037 0.44 0.928 0.000 3.200 5.609 1.58 0.914 0.000 0.983 1.590 0.48 0.932 0.000 3.811 6.789 6.45 0.962 0.000 3.996 10.018 8.09 0.895 0.000 0.457 2.048 1.70 0.948 0.000 -2.870 -10.180 -4.40 0.967 0.000 1.800 5.542 18.34 0.977 0.000 1.852 7.330 5.51 0.852 0.000 2.223 5.987 2.83 0.952 0.000 2.418 5.780 4.77 0.946 0.000 2.791 7.256 4.89 1.129 0.000 -17.314 -22.796 -15.59 0.967 0.000 1.960 6.818 1.10 0.988 0.005 0.402 1.012 0.17 0.994 0.000 -16.313 92.292 -7.79 0.991 0.000 -20.145 196.315 -8.81 1.082 0.000 -21.397 304.507 -16.51 0.999 0.000 -12.271 483.721 -1.62 0.795 0.000 6.613 8.467 3.360 6.385 0.000 -16.670 -238.062 -43.833

Dividend Payout Ratio 0.045 0.000 0.000 0.000 0.157 0.248 0.000 0.000 0.087 0.218 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.596 0.000

Performance of FMCG Companies of Indian Stock Market

Table 4.5: Rotated component matrices of the factors/dimension Sl. No.

Variables

Profitability

Efficiency

Liquidity

Turnover ratio

Market

1.

Net profit margin ratio

0.97

-0.09

0.12

0.06

0.08

0.04

0.00

2.

Gross profit margin ratio

0.85

-0.17

0.14

-0.01

0.01

-0.13

0.32

3.

Expenses ratio

-0.97

0.12

-0.14

-0.04

-0.04

-0.02

-0.01

4.

Fixed asset to net worth ratio

0.06

0.96

-0.01

-0.03

0.02

-

-0.01

5.

Debt equity ratio

-0.21

0.90

-0.10

0.07

0.03

-0.04

-0.11

6.

Return on equity

0.25

0.02

0.00

0.11

-0.06

-0.13

7.

Return on gross capital employed

0.20

-0.90 0.07

0.85

-0.05

0.30

-0.15

0.12

8.

Earnings per share ratio

0.15

-0.24

0.84

0.03

0.02

0.18

0.02

9.

Debt service ratio

0.08

-0.01

0.61

0.11

-0.14

-0.21

0.12

10.

Cash ratio

0.09

0.05

0.25

-0.22

0.26

0.23

11.

Debtor turnover ratio

0.07

-0.02

0.55 0.03

0.92

0.26

0.07

-0.13

12.

Current ratio

0.02

0.04

0.03

-0.22

0.03

-0.08

13.

Total asset turnover ratio

0.05

-0.05

0.08

0.90 -0.06

0.91

0.07

-0.05

14.

Inventory turnover ratio

0.09

0.01

-0.02

0.27

0.57

0.12

15.

Fixed asset turnover

0.02

-0.01

0.02

-0.05

0.69 0.27

0.87

0.02

16.

Fixed asset to long term funds ratio

0.20

0.06

-0.16

-0.31

0.38

0.19

17.

Dividend payout ratio

0.15

0.02

0.13

-0.13

0.06

-0.63 -0.08

18.

Current asset turnover ratio

0.08

0.25

-0.40

0.33

0.27

-0.12

-0.46

19.

Debt to capital ratio

-0.23

-0.11

-0.55

0.15

0.10

-0.19

-0.55

0.89

53

Table 4.6: Top ten FMCG sector based on factor analysis Sl. No.

Companies

RANKING

1.

Colgate Palmolive (India)

High

2.

ITC

High

3.

Amrit Corporation

High

4.

Murli Industries.

High

5.

REI Six Ten Retail

High

6.

Britannia Industries

High

7.

Kewal Kiran Clothing

High

8.

Dabur India

High

9.

Tata Coffee

High

10.

Flex Foods

High

Table 4.7: Medium performing FMCG sector based on factor analysis Sl. No.

54

Companies

Ranking

1.

Umang Dairies

Medium

2.

ADF Foods Industries

Medium

3.

Kothari Products

Medium

4.

Hatsun Agro Products

Medium

5.

Shoppers Stop

Medium

6.

Kohinoor Foods

Medium

7.

KGN Enterprises

Medium

8.

V-Mart Retail

Medium

9.

Kwality Dairy (India)

Medium

10.

Trent

Medium

Bindiya, K.

Table 4.8: Top least performing FMCG sector based on factor analysis Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Company

Ranking Low Low Low Low Low Low Low Low Low Low

Vikas Granaries Anik Industries Sanwaria Agro Oils Cantabil Retail India Divya Jyoti Industries Ajanta Soya Modern Dairies Agro Dutch Industries Golden Tobacco Lotus Chocolate Company

Table 4.9: Ranking of companies based on ratio Sl. No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

RATIO Current ratio Cash ratio Inventory turnover ratio Debtor turnover ratio Total asset turnover ratio Fixed asset turnover Current asset turnover Net worth capital turnover ratio Debt equity ratio Debt to capital ratio Fixed asset to net worth ratio Fixed asset to long term funds ratio Debt service ratio Gross profit margin ratio Net profit margin ratio Expenses ratio Return on gross capital employed Return on equity Earnings per share Dividend payout ratio

Performance of FMCG Companies of Indian Stock Market

HIGH 1.57 0.4 5.81 6.64 2.56 5.48 57.7 0.77 2.91 0.17 235.15 47.81 73.68 14.46 0.13 0.79 27.95 -2.22 71.64 0.39

RANKING LOW MEDIUM 8.69 4.18 0.24 0.51 15.69 9.24 15.52 11.82 2.83 2.85 14.99 23.04 238.39 62.99 -6.92 -1.64 -2.24 1.42 0.59 0.47 -111.17 86.38 34.09 38.66 0.01 46.26 -2.52 7.35 -0.51 0.04 1.32 0.91 -3.53 9.78 51.6 18.52 -3.78 17.55 0 0.11 55

4.3 To analyze investment risk A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. The results pertaining to the investment risk of FMCG Company‟s assessed through Value at risk and the same is presented in the Table 4.10 for the financial year of 2008-2009 to 2012-2013. In order to analyze the investment pattern of the selected FMCG, the close price for the fast five year from 2008 to 2013 were considered. This analyze gives the proportion change in the investment risk in Fast-Moving Consumer Goods sector. It is clear from the Table 4.10 that Nestle (38%) have low investment risk followed by Colgate Palmolive (40%), Britannia (43%), ITC (46%) and Dabur India (46%). The results pertaining to the growth pattern and investment risk of FMCG Company‟s assessed through Compound annual growth rate and Value at risk method and the same is presented in the Table 4.11 for the financial year of 2008-2013. In order to analyze the growth pattern and investment risk of the selected FMCG, the close price for the fast five year from 2008 to 2013 were considered. It is clear from the Table 4.11 that Nestle have high growth rate (28.41%) and low investment risk (38%) followed by Tata coffee, ITC and Colgate Palmolive etc.

56

Bindiya, K.

Table 4.10: Analysis of Investment risk in FMCG Companies Sl. No.

Company

VaR (%)

1.

ITC

46

2.

Nestle

38

3.

Britannia

43

4.

Tata Coffee

74

5.

Ruchi Soya Industries

89

6.

Agro Tech Foods

78

7.

Hindustan Foods

78

8.

Future Retail

94

9.

Dabur India

46

10.

Colgate Palmolive

40

11.

Mount Everest Mineral Water

84

12.

Kohinoor Foods

84

13.

Kwality dairy

101

14.

Sanwaria Agro Oils

133

15.

Modern dairies

106

16.

Golden Tobacco

90

17.

Usher Agro

91

Performance of FMCG Companies of Indian Stock Market

57

Table 4.11: Analysis of Investment risk and growth pattern in FMCG Companies Sl. No

58

Company

Growth rate (%)

VaR (%)

1.

ITC

29.57

46

2.

Nestle

28.41

38

3.

Britannia

10.25

43

4.

Tata Coffee

50.56

74

5.

Ruchi Soya Industries

12.34

89

6.

Agro Tech Foods

36.78

78

7.

Hindustan Foods

36.78

78

8.

Future Retail

-12.94

94

9.

Dabur India

24.68

46

10.

Colgate Palmolive

27.90

40

11.

Mount Everest Mineral Water

6.82

84

12.

Kohinoor Foods

-26.12

84

13.

Kwality dairy

33.98

101

14.

Sanwaria Agro Oils

-15.12

133

15.

Modern dairies

-22.63

106

16.

Golden Tobacco

26.88

90

17.

Usher Agro

0.99

91

Bindiya, K.

160 Growth rate

(%)

140 Value at risk

(%)

120 100 80 60 40

20 0 -20 -40

FMCG Companies

Fig. 3: Analysis of Investment risk and growth pattern in FMCG Companies

CHAPTER V

DISCUSSION The results obtained in the previous chapter are discussed in this chapter. The discussion was presented under the following headings, for the purpose of analytical clarity. 5.1 To analyze the growth and variability 5.2 To analyze the financial performance 5.3 To analyze investment risk

5.1 To analyze the growth and variability Compound annual growth rate (CAGR) was calculated to analyze the growth factors covering annual growth for the period of five years. CAGR were calculated for 17 companies. Discriminant analysis was used to analyze the factors responsible for good and poor performance of companies. 5.1.1 Growth rate of companies based on percentage The FMCG sector have a great opportunity for growth and development in the country, with the growing population, the rising disposable incomes, education, urbanization, the advent of modern retail and a consumption-driven society. Table 4.1 and Fig.1 presents the year wise growth pattern of FMCG sector, for the period of 2008 -09 to 2012-13. The growth pattern of FMCG sector was analyzed and estimated in terms of percentage. It is clear from the Table 4.1 and Fig.1 indicates that positive growth rate in Kwality Dairies (176.24%) in the year 2008-09 followed by Usher Agro (68.36%) in the year 2011-12 was very high revealing the strength of the company‟s operation in the industry, with high net profit margin which results in better use of favorable conditions, like optimum price policy, economies in cost of production focusing on creation of additional demand for the product. Though the growth was negative in case of Kwality Dairies (-153.10%) in the year 2011-12 followed by Future Retail (-51.54%) in the year 2011-12. Table 4.1 and Fig.1 it indicates ITC, Britannia, Colgate Palmolive has growing year by year but it is very surprise to see that poor growth in FMCG sector during the year 2012-13. From the Table 4.2 and Fig. 2 presents the cumulative growth rate of FMCG sector, for the period of five years from 2008 to 2013.It is clear from the Table 4.2 that Tata Coffee have a highest growth of about 50.56% followed by Agro tech Foods (36.78%) and Hindustan Foods (36.78%). It implies that these companies have widest distribution networks in India. From the fast five years have been constantly growth in offering technology and advanced solution. It indicates good performance of the

Performance of FMCG Companies of Indian Stock Market

59

company while company‟s like Kohinoor Foods (-26.12%) Samaria Agro oils (-15.12%) followed by Modern Dairies (-22.67%) have least growth rate in FMCG sector. which indicate these are bad performers of the company. It implies companies had high investment risk. In case of this share holders cannot likely to gain the profit. Value appreciate may not be possible. 5.1.2 Factor Discriminating good and poor performing companies Discriminant analysis was employed to distinguish between good and poor performing companies. Companies were distinguished good and bad based on the overall factor scores obtained in factor analysis (Table4.3). The results revealed that Net profit margin ratio, Gross profit margin ratio and Earning per share had Negative co-efficient while the other variables had private co-efficient. The entire ratios are significantly superior in good companies compared to poor companies. It was found that Current ratio (13.47), Debt equity ratio (21.98), Debt to capital ratio (85.47), Expense ratio (989.32), Return on gross capital employed (30.43) and Dividend payout ratio (26.84) have been significantly differentiated good FMCG companies from poor companies. Companies having good current ratio and debt equity ratio, Debt to capital ratio were good as well as dividend payout ratio. These are the indicators of strong financial Performance. Using discriminate analysis, Power (2009) observed that there was no significant difference between the consumers shopping at organized retail chains located in central and peripheral region of Bangalore. Though income and expenditure an FMCG products discriminated more between these groups. Using discriminate analysis, Nandini (2010) observed that there was significant difference between good FMCG companies from poor companies. Companies having good sales to capital employed ratio and return on capital employed were good in interest coverage as well as dividend payout ratio. These are the indicators of strong financial Performance. The factors like Net profit margin ratio, Gross profit margin ratio and Earning per share are not significantly contributing to the difference, but they are contributing to the poor performance of the companies.

5.2 To analyze the financial performance Financial ratios such as leverage ratios, liquidity ratios, profitability ratios, Activity ratios, operating ratios and market test ratios were employed for selected FMCG companies. The results are presented in Table 4.4. 5.2.1 Leverage ratios To judge the long-term financial position of the FMCG companies, financial leverage, or capital structure ratios were calculated. Long-term creditors like debenture holders, financial institution and other stakeholders are more concerned with company‟s long-term financial strength. These ratios indicate mix of funds provided by owners and

60

Bindiya, K.

lenders. As a general rule, there should be an appropriate mix of debt and equity in financing the company‟s assets. From the results (Table 4.4) it is clear that fixed asset to net worth ratio was calculated and showed maximum of 2071.17 per cent for Murali Industries followed by 335.34 per cent for Hatsun Agro Products. This implies company‟s has been more effective in using the investment in fixed assets to generate revenues and low ratio (Agro Dutch Industries) indicate of greater solvency because the lower the ratio becomes, the more fund that are available to meet current obligation. Debt equity ratio clearly indicates that companies were less dependent on outside borrowing since the ratio obtained for all the companies was less than the standard norms 2:1, which is again depends on the sector in which the organization falls. The result depicts that companies like Colgate, ITC, Amrit Corporation have a greater chance to borrow more funds in order to finance the expansion or adding additional capacity or update the technology to increase their production capacity. It also implies that the companies are self sufficient in meeting long term obligation. Higher debt-to-equity ratio is unfavorable because it means that the business realize more on external lenders thus it is at higher risk, especially at higher interest rates. Fixed asset to long term funds was recorded maximum of 106.43 per cent for Umang dairies followed by 106.21 per cent for Agro Dutch Industries and the minimum was 1.69 per cent for Kothari products. The ratio for the rest of the companies varies between1.69 per cent to 106.21 per cent. It implies fixed assets ratio is 106.43%, it means we have fixed assets of 6.43 per cent which we bought from our short term fund, and this long term solvency is not good because at that time we are using our short term funds for long term assets. At that time, our short term financial position may be affected from this. The Debt to service ratio shows how many times the interest charges are covered by operating cash flows that are available for payment of interest. Based on the results obtained, the debt service ratio in companies likes Colgate Palmolive and Zydus Wellness was extremely good since their debt equity ratio was less and also high level of performance, their coverage will be very high. Among the other company‟s the debt service ratio was fairly good except Cantabil Retail, Golden Tobacco and Koutons Retail company since it was not utilizing the funds effectively for production activities. 5.2.2 Liquidity ratios Liquidity was an important concept in any business enterprise in order to test the liquidity position of any company the current ratio was used as a tool to analyze the liquidity position of the companies. From the results (Table 4.4) Current ratio was recorded maximum of 18.42 for Kwality Dairy followed by 16.56 for Sita Shree Food Product indicating that these companies were not efficient in turning out their inventory into actual sales and under utilization of current assets, dependency of the business enterprise on short-term borrowings for working capital was less, in respect majority of the companies like

Performance of FMCG Companies of Indian Stock Market

61

Colgate Palmolive, ITC, Tata Coffee and Agro Dutch Industries current ratio was low and below the minimal acceptable level value of ratio two indicating that these companies were more efficient in using working capital and also depicts the ability to convert inventory into actual sales. This has been collaborated in the study revealing that (Suprabha, 2009 and Nandini, 2010) firm should maintain acceptable level of current ratio i.e. two to meet the working capital requirements. Cash ratio was recorded maximum of 4.06 for Zydus Wellness followed by 1.84 for Amrit Corporation. It indicates that these companies have cash ratio of 1 and above means that the business will be able to pay all its current liabilities in immediate short term. Therefore, creditors usually prefer high cash ratio. 5.2.3 Profitability ratios In the study the profitability ratios were analyzed for measuring the efficiency of the FMCG companies utilizing their resources for generating revenue. The profitability of the study units in this case analyzed through Net profit margin ratio, Return on investment, Earning per share (EPS), Return on assets ratio and Return on equity. It was found from Table 4.4 that Net profit margin ratio of companies like Amrit Corporation (0.52), Zydus Wellness (0.27) and ITC (0.24) was very high revealing the strength of the company‟s operations in the industry, with high net profit margin which results in better use of favorable conditions, like optimum price policy, economies in cost of production focusing on creation of additional demand for the product. Though the ratio was negative in case of Koutons Retail India (-7.18) due to sales turnover, the overall performance of the sector in terms of net profit margin was significant and more than that of standard norm. Nandini (2010) opined that high net profit margin can make better use of favorable conditions, such as rising selling price, falling cost of production or increasing demand for the product. Gross profit margin ratio was recorded maximum 35.56 per cent for ITC followed by 28.54 for Zydus Wellness and the minimum was recorded -67.40 Koutons Retail India. The ratio for the other companies falls between the ranges of -67.40 to 28.54. It implies that high gross profit margin ratio indicates that the company can make a reasonable profit (ITC and Zydus Wellness) as long as it keeps the overhead cost in control. A low margin ratio (Koutons Retail India) indicates that the business is unable to control its production cost. From the results it was found that Return on gross capital employed for a total asset was very high in companies like Colgate Palmolive (102.54 per cent) and Umang Dairies (75.99 per cent) since they have created huge owned assets over a period of time and utilization of these assets was efficient. In respect of Golden Tobacco return on gross capital employed was less. However the overall sector ratio was marginally high and significant. Return on equity was recorded maximum of 483.72 per cent for Lotus Chocolate Company followed by 304.51 per cent for Golden Tobacco and the minimum was –

62

Bindiya, K.

360.04 per cent for Murali Industries. The ratio for the rest of the companies varies between -360.04 to 304.51. This implies that ROE is very important yardstick of performance of any company from the point of shareholders and markets valuations. High ratio indicates the high performance of the company in terms of returns on shareholder‟s equity. Earnings per share vary between the maximum of 328.29 for Colgate Palmolive followed by 296.20 for Amrit Corporation indicating that these corporate entities financial performance was higher compared to other companies of sector and it also measures that, these companies were having better capital productivity over the other companies like Agro Dutch Industries etc,. Since the ratio indicates higher the EPS better will be the capital productivity, and market capitalization, majority of the companies in this sector were having impressive EPS. 5.2.4 Activity ratios/Turnover ratios In order to study the operational efficiency of the companies, activity ratios like inventory turnover, Total assets turnover and Sales to capital employed ratios were calculated. Inventory turnover ratio of the FMCG companies was quite high compared to any other sector. From the results showed in Table 4.4 it was found that majority of the companies had very good turnover ratio particularly Kothari Product (31.15) and Zydus Wellness (28.07), which implies that these companies were turning their inventory of finished goods into sales more often. The results also indicated that low performing companies to achieve more sales turnover due to poor pace of sales. Debtor turnover ratio was recorded maximum of 58.51 for Kwality dairies followed by 48.47 for Ajanta Soya. It indicates that these companies have better debtor turnover ratio it means faster we can collect the cash. Lower debtor turnover ratio (Koutons Retail India) is not good because it tells us that these companies have not managed debtors in a better way. Money from debtors is not collected faster. Current asset turnover ratio was recorded maximum of 291.79 for Murali Industries followed by 286.27 for Natraj Proteins. It implies higher turnover ratio which tells it is a good company because it is using its assets efficiently and the minimum was 0.49 for Amrit Corporation it tells that the company is not using its assets optimally. Fixed asset turnover ratio varies between the maximum of 259.48 for Kothari Product followed by 37.41 for Kwality Dairy and Foods. It implies company has a high fixed asset turnover ratio, it shows that the company is efficient at managing its fixed assets. Total asset turnover ratio varies between the maximum of 9.06 for Kohinoor Foods followed by 8.25 for Vikas Granaries it indicates that these companies were not using too many assets to generate sales and the minimum was 0.12 for Flex foods it implies that capital is invested on too many assets.

Performance of FMCG Companies of Indian Stock Market

63

Net working capital turnover ratio was recorded maximum of 21.33 for Tata Coffee followed by 15.98 for Divya Jyoti Industries. It implies that Net working capital turnover ratio was high; it can be an indication that company efficiently managing and selling its inventory and generate sales and the minimum was -128.45 for Modern Dairies. It indicates low Net working capital turnover ratio, it can be an indication that capital is invested in too many assets in relation to what you need. It indicates high risk is involved in this company. 5.2.5 Operating ratios Operating ratios is a measure of extend of the operating cost to sales. In this category include expense cost, labour cost and material costs were calculated. From the results it was found that companies like Zydus Wellness (26.78) and Dabur India (16.12) were using more of their profit to meet selling and distribution expenses. This phenomena further emphasis that, the promotion advertisement budget of FMCG companies are always on the higher side when compared to other sectors. Most of the companies covered in the study are in the business over decades and versatile in logistic management. Hence their distribution costs are efficient and economical. The underperforming companies in the sector like Amrit Corporation have also maintaining good selling and distribution expense ratio were efficient in managing their network at a lower cost. 5.2.6 Market test ratio Market test ratio is the difference between the Earnings per share and actual dividend paid to the share holders. This ratio mainly depends on the dividend policy of the enterprise. It is important for shareholders since it reflects the share price in the market. Dividend payout ratio was recorded maximum of 0.76 for Colgate Palmolive followed by 0.60 for Sita Shree food product This implies that since these companies have low debt to net worth ratio, able to maintain a strategy to pay more of dividend to keep their shareholders happy, in short run while the companies like Flex foods were not paying any dividend because of the poor interest coverage. 5.2.7 Rotated Components Matrices of the factor/dimension The rotated factor matrix loadings for identified factors are given in Table 4.5. This helps in identification of the variables that have large loadings on the same factor. That factor was interpreted in terms of variables that load high on it. It can be seen from the Table that the five factors contained three, three, four, six and three variables respectively. Factor 1 represented the profitability status of the companies based on the performance. Factor 2 captured the efficiency and the performance of the company‟s. Factor 3 highly related to liquidity status of the companies. Factor 4 highly related to turnover aspects of the company‟s and factor 5 represented the market status of the companies based on the performance. The loadings of variables on each factor is ranged from -0.97 to 0.97in factor one followed by -0.90 to 0.96 in factor two,0.55 to 0.85 in

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factor three,-0.63 to 0.92 in factor four and -0.55 to 0.89 in factor five. Overall loadings of variables on their respective factor ranged from 0.94 to 0.97. Factor 1 represented the profitability status of the companies which includes variables like Net profit margin ratio (0.97), Gross profit margin ratio (0.85) and Expense ratio (-0.97). Factor 2 captured the efficiency and the performance of the company‟s which includes variables like Fixed asset to net worth ratio (0.96), Debt equity ratio (0.90) and Return on equity (-0.90). Factor 3 highly related to liquidity status of the companies, which includes variables like Return on gross capital employed (0.85), Earning per share ratio (0.84), Debt service ratio (0.61) and Cash ratio (0.55). Factor 4 highly related to turnover aspects of the company‟s, which includes variable like Debtor turnover ratio (0.92), Current ratio (0.90), Total asset turnover ratio (0.91), Inventory turnover ratio (0.69), Fixed asset turnover ratio (0.87) and Fixed asset to long term funds ratio (-0.63) and Factor 5 represented the market status of the companies based on the performance which includes variables like Dividend payout ratio (0.89), Current asset turnover ratio (-0.46) and Debt to capital ratio (-0.55). Based on these factors analysis ranked the FMCG companies as high medium and least performing and they are explained below. 5.2.7.1 Top ten FMCG sector based on factor analysis From Table 4.6 we can identify that, these companies were the major contributor to the financial performance of the company‟s. From the Table 4.6 it was observed that Colgate Palmolive, ITC, Amrit Corporation, Murali Industries, REI Six Ten Retail, Britannia, Kewal Kiran Clothing, Dabur India, Tata Coffee and Flex Foods were rated as top ten performing companies since they have obtained highest factor weight ages for their excellent financial performance in the industry. They were efficient in all five dimensions of the financial management under factor analysis showing long term presence in the sector and these companies have widest distribution networks in India. From the Fast five years have been constantly growth in offering technology and advanced solution. Responding to changing consumer preference and needs is the bedrock of these companies approach to innovation. These companies were listening to their consumer and understand their usage and habits and their attitude. These companies are very efficient in earning higher return on their investment and assets. It is also signifies the strong financial position of these companies compare to other. 5.2.7.2 Medium performing FMCG sector based on factor analysis Table 4.7 represents the financial performance of the company‟s. From the Table 4.7 we can observe that Umang Dairies, ADF Foods Industries, Kothari Products, Hatsun Agro Products, Shoppers Stop, Kohinoor Foods and KGN Enterprises etc were rated as medium performing companies. It implies these companies have maintained good net profit margin. Hence they grouped as best companies.

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5.2.7.3 Least performing FMCG sector based on factor analysis Table 4.8 these companies represent the low contribution to the financial performance of the company‟s. From the Table 4.8 it was observed that Vikas Granaries, Anik Industries, Sanwaria Agro oils, Cantabil Retail India, Divya Jyoti Industries and Ajanta Soya etc were categorized as the under performers since their overall scores was less in respect of their performance due to inefficiency in their operational management and these companies have high investment risk. However, these companies were good in one of the dimensions considered in analysis.

5.3 To analyze investment risk A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. The results pertaining to the investment risk of FMCG Company‟s assessed through Value at risk and the same is presented in the Table 4.10 for the financial year of 2008-2009 to 2012-2013. In order to analyze the investment risk of the selected FMCG companies, the close price for the fast five year from 2008 to 2013 were considered. This analyze gives the proportion change in the investment risk in Fast-Moving Consumer Goods sector. It is clear from the Table 4.10 and 4.11 indicates that out of 17 FMCG companies Nestle (38%), Colgate Palmolive (40%), Britannia (43%) and ITC (46%) have low investment risk. It implies these companies have low investment which indicates, share holders always like to investment on these companies. Companies like Samaria Agro oils (133%) followed by Modern Dairies (106%) and Kwality Dairies (101%) have high investment risk. It reveals that these companies exceed 100 % of investment risk. It reflects negative growth rate in these companies. These are extremely good and poor performance of the company. Which implies poor performance of the company have high investment risk. The results pertaining to the growth pattern and investment risk of FMCG Company‟s assessed through Compound annual growth rate and Value at risk method and the same is presented in the Table 4.11 for the financial year of 2008-2013. In order to analyze the growth pattern and investment risk of the selected FMCG, the close price for the fast five year from 2008 to 2013 were considered. It is clear from the Table 4.11 that Nestle have high growth rate (28.41%) and low investment risk (38%) followed by Tata coffee, ITC and Colgate Palmolive etc. It implies these companies have positive growth rate which indicates, share holders always like to investment on these companies.

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CHAPTER VI

SUMMARY AND CONCLUSION Since the FMCG is one of the fastest growing sectors in the country, many new players are entering the business with novel formats to reach consumers. They are already well established corporate operating in this sector. This sector is dynamic, characterized by high turnover and low percentage of profit. This study is a humble attempt to determine the financial performance of FMCG companies. Keeping the above aspects in view the study was conducted with the following objectives 1) To analyze the growth and variability of Fast-Moving Consumer Goods of stock price 2) To analyze performance of Fast-Moving Consumer Goods sector With market index 3) To analyze investment risk in Fast-Moving Consumer Goods sector

6.1 Database The detailed information required for the study on 44 FMCG companies listed in Indian stock market was collected from secondary source like published annual accounts and balance sheet of the companies from www.moneycontrol.com and other related sources for the financial year 2008-09 to 2012-13 in order to accomplish the various objectives of the study. All the relevant financial ratios were computed to analyze the growth of selected FMCG companies and the financial performance of FMCG companies and to analyze Investment risk in Fast-Moving Consumer Goods sector.

6.2 Analytical techniques Statistical techniques were employed to accomplish the various objective of the study. Ratio analysis employed to analyze the financial performance through solvency, liquidity, operating, profitability and market performance. Value at risk used to analyze the investment risk. Discriminant analysis was used to analyze the factors responsible for good and poor performance of companies. Factor analysis used to analyze the factor responsible for good and poor performance of company covering their efficiency. Finally CAGR was calculated to analyze the growth factors covering annual growth for the period of five years. CAGR were calculated for 17 companies.

6.3 Findings of the study 1.

Overall growth rate analysis indicate that highest growth rate has seen in Kwality Dairies (176.24%) in the year 2008-09 followed by Usher Agro (68.36%) in the year 2011-12 and the least growth in Kwality Dairies (-153.10%) in the year 2011-12.

2.

The companies like Tata coffee have a highest growth of about 50.56% followed by Agro tech Foods (36.78%) and Hindustan Foods (36.78.

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3.

As the discriminant analysis indicates that companies having good current ratio and debt equity ratio, Debt to capital ratio and dividend payout ratio are significant factors contributing to the good performance of the companies (Colgate Palmolive ranked high position followed by ITC, Amrit Corporation, Murali Industries, REI Six Ten Retail, Britannia, Kewal Kiran Clothing, Dabur India, Tata Coffee and Flex Foods) and the companies having poor Net profit ratio and Earnings per share these are poor significant factors contributing poor performance of the companies (Sanwaria Agro oils followed by Modern Dairies and Kwality Dairies).

4.

Fixed asset to net worth ratio was calculated and showed maximum of 2071.17 per cent for Murali Industries followed by 335.34 per cent for Hatsun Agro Products. This implies company‟s has been more effective in using the investment in fixed assets to generate revenues and low ratio (Agro Dutch Industries) indicate of greater solvency because the lower the ratio becomes, the more fund that are available to meet current obligation.

5.

Debt equity ratio clearly indicates that companies were less dependent on outside borrowing since the ratio obtained for all the companies was less than the standard norms 2:1, which is again depends on the sector in which the organization falls. The result depicts that companies like Colgate, ITC, Amrit Corporation have a greater chance to borrow more funds in order to finance the expansion or adding additional capacity or update the technology to increase their production capacity. It also implies that the companies are self sufficient in meeting long term obligation. Higher debt-to-equity ratio is unfavorable because it means that the business realize more on external lenders thus it is at higher risk, especially at higher interest rates.

6.

The Debt to service ratio shows how many times the interest charges are covered by operating cash flows that are available for payment of interest. Based on the results obtained, the debt service ratio in companies likes Colgate Palmolive and Zydus Wellness was extremely good since their debt equity ratio was less and also high level of performance, their coverage will be very high. Among the other company‟s the debt service ratio was fairly good except Cantabil Retail, Golden Tobacco and Koutons Retail company since it was not utilizing the funds effectively for production activities

7.

Current ratio was recorded maximum of 18.42 for Kwality Dairy followed by 16.56 for Sita Shree Food Product indicating that these companies were not efficient in turning out their inventory into actual sales and under utilization of current assets, dependency of the business enterprise on short-term borrowings for working capital was less, in respect majority of the companies like Colgate Palmolive, ITC, Tata Coffee and Agro Dutch Industries current ratio was low and below the minimal acceptable level value of ratio two indicating that these companies were more efficient in using working capital and also depicts the ability to convert inventory into actual sales.

8.

Gross profit margin ratio was recorded maximum 35.56 per cent for ITC followed by 28.54 for Zydus Wellness and the minimum was recorded -67.40 Koutons Retail India. The ratio for the other companies falls between the ranges of -67.40 to 28.54. It implies that high gross profit margin ratio indicates that the company can make

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a reasonable profit (ITC and Zydus Wellness) as long as it keeps the overhead cost in control. A low margin ratio (Koutons Retail India) indicates that the business is unable to control its production cost. 9.

Return on equity was recorded maximum of 483.72 per cent for Lotus Chocolate Company followed by 304.51 per cent for Golden Tobacco and the minimum was – 360.04 per cent for Murali Industries. The ratio for the rest of the companies varies between -360.04 to 304.51. This implies that ROE is very important yardstick of performance of any company from the point of shareholders and markets valuations. High ratio indicates the high performance of the company in terms of returns on shareholder‟s equity. Earnings per share vary between the maximum of 328.29 for Colgate Palmolive followed by 296.20 for Amrit Corporation indicating that these corporate entities financial performance was higher compared to other companies of sector and it also measures that, these companies were having better capital productivity over the other companies like Agro Dutch Industries etc,. Since the ratio indicates higher the EPS better will be the capital productivity, and market capitalization, majority of the companies in this sector were having impressive EPS.

10. Debtor turnover ratio was recorded maximum of 58.51 for Kwality Dairies followed by 48.47 for Ajanta Soya. It indicates that these companies have better debtor turnover ratio it means faster we can collect the cash. Lower debtor turnover ratio (Koutons Retail India) is not good because it tells us that these companies have not managed debtors in a better way. Money from debtors is not collected faster. 11. Net working capital turnover ratio was recorded maximum of 21.33 for Tata Coffee followed by 15.98 for Divya Jyoti Industries. It implies that Net working capital turnover ratio was high; it can be an indication that company efficiently managing and selling its inventory and generate sales and the minimum was -128.45 for Modern Dairies. It indicates low Net working capital turnover ratio, it can be an indication that capital is invested in too many assets in relation to what you need. It indicates high risk is involved in this company. 12. Companies like Zydus Wellness (26.78) and Dabur India (16.12) were using more of their profit to meet selling and distribution expenses. This phenomena further emphasis that, the promotion advertisement budget of FMCG companies is always on the higher side when compared to other sectors. 13. Dividend payout ratio was recorded maximum of 0.76 for Colgate Palmolive followed by 0.60 for Sita Shree food product This implies that since these companies have low debt to net worth ratio, able to maintain a strategy to pay more of dividend to keep their shareholders happy, in short run while the companies like Flex foods were not paying any dividend because of the poor interest coverage. 14. Colgate Palmolive, ITC, Amrit Corporation, Murali Industries, REI Six Ten Retail, Britannia, Kewal Kiran Clothing, Dabur India, Tata Coffee and Flex Foods were rated as top ten performing companies since they have obtained highest factor weight ages for their excellent financial performance in the industry.

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15. Umang Dairies, ADF Foods Industries, Kothari Products, Hatsun Agro Products, Shoppers Stop, Kohinoor Foods and KGN Enterprises etc were rated as medium performing companies. It implies these companies have maintained good net profit margin. 16. Vikas Granaries, Anik Industries, Sanwaria Agro oils, Cantabil Retail India, Divya Jyoti Industries and Ajanta Soya etc were categorized as the under performers. 17. Companies like Samaria Agro oils (133%) followed by Modern Dairies (106%) and Kwality Dairies (101%) have high investment risk. It reveals that these companies have exceeds 100 % of investment risk. It reflects negative growth rate in these companies. These are extremely good and poor performance of the company. Which implies poor performance of the company have high investment risk

6.4 Strategies to improve the performance Based on the findings of the study, the following strategies are suggested to improve the financial performance of the FMCG companies. 1. Companies like Sanwaria Agro Oils, Cantabil Retail India and Ajanta Soya are under performing when compared to good performing companies in the sector It is suggested that these companies should strictly adhere to norms suggestion for various ratio and work towards achieving the standard norms apart from these they should workout the strategies at least to cover interest to increase the sales and realize the better profit to ensure comfortable return on capital employed. Urgent necessity in reduction in cost and enhancement of profit.

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CHAPTER VII

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APPENDIX-I GLOSSARY ITC

Indian tobacco company

REI

Reliance

KGN

Khawja garib nawaz

BSE

Bombay stock exchange

IIP

Index of industrial production

NZSE

New Zealand stock exchange

WPI

Wholesale price index

NSE

National stock exchange

KLRF

Kovilpatti Lakshmi Roller Flour

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APENDIX-II List of companies selected for the study Sl. No.

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Companies

1.

Colgate Palmolive (India)

2.

ITC

3.

Amrit Corporation

4.

Murli Industries.

5.

REI Six Ten Retail

6.

Britannia Industries

7.

Kewal Kiran Clothing

8.

Dabur India

9.

Tata Coffee

10.

Flex Foods

11.

Umang Dairies

12.

ADF Foods Industries

13.

Kothari Products

14.

Hatsun Agro Products

15.

Shoppers Stop

16.

Kohinoor Foods

17.

KGN Enterprises

18.

V-Mart Retail

19.

Kwality Dairy (India)

20.

Trent

21.

Zydus Wellness

22.

Natraj Proteins

23.

JVL Agro Industries

24.

Sita Shree Food Products

25.

Brandhouse Retails

26.

Freshtrop Fruits

27.

Tasty Bite Eatables

28.

Heritage Foods (India)

Bindiya, K.

29.

LT Foods

30.

KLRF

31.

Ruchi Soya Industries

32.

Vimal Oils and Foods

33.

Vikas Granaries

34.

Anik Industries

35.

Sanwaria Agro Oils

36.

Cantabil Retail India

37.

Divya Jyoti Industries

38.

Ajanta Soya

39.

Modern Dairies

40.

Agro Dutch Industries

41.

Golden Tobacco

42.

Lotus Chocolate Company

43.

Flex food

44.

Koutons Retail India

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