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Section D : Case Study (50 Marks) This section consists of questions with serial number 1 - 6. Answer all questions. Marks are indicated against each question. Do not spend more than 80 - 90 minutes on Section D. Case
Study Read the case carefully and answer the following
questions: 1. Discuss the factors that affect Dabur India Ltd. and its competitors regarding the demand and supply of its products, also explain a logical framework for analyzing and forecasting revenue for the same. (10 marks) < Answer > 2. Perform the four factor ROE analysis for Dabur India Ltd. for the last five years, and comment on the same. (8 marks) < Answer > 3. a. Find the P/E ratio for Dabur India Ltd., considering the projected EPS as on 31st March 2006, and the market price as on 31st March 2005. Growth rate for projecting EPS as on 31st March 2006 will be based on the simple average growth rate of the last five years. b. What growth rate is consistent with the market price of the company as on 31st March 2005 according to free cash flow model assuming growth rate increase in first five years and then it linearly comes down in the next 5 years to stabilize at 5%. The required rate of return by equity shareholders is 12%. (4 + 1 0 = 14 marks) < Answer > 4. Based on the information given in Annexure1, determine the suitability of the Dabur India Ltd., stock for investment if an individual investor wants the proportion of unsystematic risk in his investment not to exceed 60%. (7 marks) < Answer > 5. Valuing a company with inconsistent schedule of earning, or worse with no earning at all, requires a delicate balancing act on part of analyst. In such instances traditional methods of valuations befall to helplessness. With respect to this explain the importance of Price to Sales ratio as an alternative for Price to Earning ratio for valuing a company. (6 marks) < Answer > 6. Comment on whether the stock should be bought, sold or held at points A, B, C, D, and E based on the share price charts given in Annexure II. (5 marks) < Answer
> FMCG Sector Fast Moving Consumer Goods (FMCG) sector is the fourth largest sector in the economy with a total market size of around Rs 60,000 crores. This industry comprises of consumer non durable products and provides the day-to-day need of the inhabitants. The FMCG sector is an essential component of the India’s GDP and plays a significant role in the employment generation. Around 5% of factory employment is through this sector. This sector also creates employment for more than three million people, who are in small towns and rural areas. The 2005-06 Union Budget also have few things to offer to this sector and thus prospects have come under sharp focus. Features of FMCG Sector The FMCG are generally described as products, which are used regularly by the consumer. They are branded, non-durable products sold in packaged forms that are used by the consumer. The industry includes products used by various categories of peoples. The products can be segmented in personal care, household care, packaged food and beverages, spirits, tobacco, etc. One or more players in the industry dominate each of the above product segments. Godrej Soaps, Colgate-Palmolive, Marico, Dabur and Procter & Gamble dominate personal care products. In household care segment major companies are Hindustan Lever, Nirma, Reckitt & Colman etc., Food and beverages segment includes Hindustan Lever, Nestle, Cadbury and Dabur as the major players. ITC, Godfrey Philips, UB and Shaw Wallace dominate the spirit and tobacco segment of the FMCG industry. According to the opinion of the inhabitants, the perception of FMCG sector are as producer of luxury items targeted at the privileged, but in reality the sector meets the every day needs throughout the country. Lower income and lower-middle income groups’ explains around 60 per cent of the total FMCG sector’s sales. The majority of sales volume comes from low-priced products. FMCG outlets had reached even in small villages where basic needs such as schools and transportation facility is not available. The rural market account for 56 per cent of total domestic FMCG demand. The FMCG sector has several other salient features. The sector is strongly associated with the agro-based products. It is a significant value creator with market capitalization of second only to the IT sector and is a key contributor to the exchequer. Its contribution to corporate tax, central excise and sales tax and state tax is also noteworthy. Sectoral Snapshot FMCG sector is under tremendous pressure from last three years, however due to renew market expectations and prospects things seem to have changed from last four quarters. In India, companies like HLL, ITC, Colgate, Nestle, Nirma and Cadbury dominated the FMCG sector, with each one having their own market niche. But gradually the outlook is changing; new players are entering with huge expectations and proving their point. In the last four quarters, things have changed and the FMCG sector is back on track towards the path for recovery. Growth is being witnessed in urban as well as rural areas. But this time around, small companies are making good profits, as they follow a simple strategy to give more incentive to encourage the customers than their bigger brothers. The last year’s revenue and net profit growth for the companies in this sector are as under: Summary of company
results
Dynamics According to some experts and market analysts, FMGC sector should be dealt with active approach, as the sector will continue to see the price wars where the business will be the prime factor for the profit growth of the company. Sector has observed good growth in the volume but, price cuts in products by over 25% hit the value growth for the companies. Companies are also taking advantages by virtue of setting up their manufacturing units in tax havens like Himachal Pradesh, Jammu and Kashmir, Assam and Uttranchal. Many companies started manufacturing rather than outsourcing their product to protect the profit margins in absence of increasing prices. Government is also taking a step forward to make India an outsourcing hub for agri-products. It will help the farmers in expanding and increasing their efficiency. Due to increasing use of information technology, companies are improving their working capital cycle and reducing their inventory levels. This will help the company by controlling cost and increasing margins. Most of the companies are spending their money and effort in promoting their brands. Building the brand name is of utmost importance in the FMCG industry. Distribution network for the FMCG companies also helps them in achieving the growth in revenues. On the other hand monsoon affects the industry in a major way. Despite a lower than optimal monsoon last year, agricultural production is good. However the monsoon this year has been good throughout the country and a better year for agriculture is predicted. Surge in crude oil prices also affected the margins of the companies and the volatilities in the price of the crude oil will keep pressure on the FMCG sector. Mergers and acquisitions also play a crucial factor in the dynamics of this sector. Last year, two major acquisitions took place in the FMCG sector – Procter & Gamble announced the global acquisition of Gillette and homegrown Dabur announced that it would take over domestic toothpaste and household care company Balsara Hygiene. Outlook The FMCG sector will continue to grow the business considering the overall economy of the country. The per capita consumption in India for the FMCG product is amongst the lowest in the world. This shows the scope of expansion in India in the FMCG sector. Even if we compare the consumption with the countries like China and Thailand there is enough scope for FMCG sector to grow. Companies are changing the mindset of the people by offering new generation products. Companies are reaching to the rural sector where the penetration is low and thus building up the infrastructure facilities. Companies like HLL and ITC have started Project Shakti and E-Choupal, but still unable to capture significant share in the market. Owing to the vast growth potential, many big corporates are jumping into the sector like Reliance industries, ITC etc. International giants are also viewing India as its retail chain destination like Wal-Mart, etc. Dabur India Ltd.
(DIL) Background Dabur India is the country’s fourth largest FMCG Company with interests in Health care, Personal care and Food products. Dabur has a turnover of Rs1240 crores with brands such as Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola & Real. The company has its manufacturing units at Alwar, Rajasthan - Baddi near Solan, Himachal Pradesh - Katni near Jabalpur, Madhya Pradesh - Sahibabad near Ghaziabad, Uttar Pradesh. The company has wide and deep market penetration with 47 C&F agents, more than 5000 distributors and over 1.5 million retail outlets all over India. The company demerged its pharma business w.e.f 1st April 2003 to unlock value in both pharma & FMCG business. Consequently upon demerger of the pharmaceutical division fixed assets of Rs. 5574 crores, General Reserve Rs.18618, Investment Rs.7652, Secured Loans Rs. 437, Current Assets Rs. 8854, Unsecured Loans Rs. 2394, Loan & Advances Rs. 631, Current Liabilities & Provisions Rs. 1324 and Deferred Tax/Misc Expenditure Rs. 62 has been transferred to Dabur Pharma Ltd. Business and
Products Dabur is a trusted name in natural health care for over 100 years and is known for providing a range of efficacious products based on the principles of Ayurveda. It has some famous brands like Vatika, Hajmola, Anmol, Real and Balsara. Vatika is a premium brand and a leader in its category as one of the flagship brand with a popular name in the natural personal care products. Hajmola is a tasty fun-filled digestive available in various forms from tablets, traditional churnas to modern formats like center-filler candy appealing to all age groups. Anmol is a relatively new member in the family of Dabur’s key brands, provided a range of herbal and natural products across various FMCG categories with a focus on providing quality and affordability. Real is the country’s leading brand of packaged fruit juices, provide the largest range of refreshing and health fruit juices that are 100 per cent natural and free of preservatives. Balsara is a leading producer of oral care and household care products in the Indian market and a new member in the Dabur range of products. Company has acquired three Balsara group companies – Balsara Hygiene Products, Balsara Home Products and Besta Cosmetics. The company is expecting further strengthening of its oral care portfolio and making its debut in the high-growth home care segment. This acquisition declares Dabur as a prominent FMCG brand which includes like Promise, Babool and Meswak toothpaste and in household care it has Odonil, Odopic and Odomos, which adds Rs.2 billion to its revenues. Oral care products account for 56% of Balsara’s revenues while household products contributes 44%. In addition to its core oral care and household care businesses, Balsara also has export business consists of 15% of its revenue. In India, three divisions — Consumer Care Division (CCD), Consumer Healthcare Division (CHD) and the wholly owned subsidiary Dabur Foods Limited, carry out the company’s business. On a consolidated basis CCD contributes 82 per cent, CHD contributes 8 per cent and DFL contributes 10 per cent to the Company’s domestic revenues, while CCD remains the leading division and a focus area. During 2004-05 the Company undertook several initiatives to grow deliberately in smaller divisions — CHD and Foods. These divisions, with relatively smaller sales base, are seen as key drivers of future growth. International
Business During
2003-04, the Company started giving greater impetus to the international
business. The entire international operation was reorganized and an
umbrella organization called Dabur International Limited was created to
provide focus and structure to the international initiatives. This entity
has an independent team and operates from Dubai. Overseas sales grow up by
43.4% per cent from Rs.128 crores in 2003-04 to Rs.183.6 crores in
2004-05. The overseas impetus has been maintained and the share of
overseas in Dabur’s total sales increased from 9.6 per cent in 2003-04
to11.9 percent in 2004-05. The data of relative domestic and overseas
sales and net profit for the consolidated entity is given in table given
below. Relative share of Sales and
Profits of domestic and overseas businesses
Recent
Developments The company is intending upon creating a backward integration platform for herbal inputs, especially those on the endangered list. To this end, Dabur has made a foray into contract farming for selected herbs as part of the agro biotechnology initiative. Under this initiative, a number of backward integration programmes have been set up in Andhra Pradesh, Tamil Nadu, Haryana, Uttar Pradesh, Himachal Pradesh, Uttaranchal, Jammu and Kashmir and Nepal to develop sustainable cultivation of these engendered species through contract farming and buy back arrangements. Dabur entered into contract farming agreements with farmers through a local coordinator. The company also organizes quality-planting material with promising genetic potential to farmers on no-profit-no-loss basis and provides additional technical support. In all, about 2500 acres of land and 29 medicinal herbs have been covered under these programmes, which contribute to environment and adds to the income of farmers in addition to providing a sustainable source of herbal inputs to the company. In the current inflationary backdrop, supply chain efficiencies have assumed even greater importance. Company’s initiatives over the last couple of years in supply chain management have stood them in good despite R&D has been the cornerstone of Dabur’s success. Dabur Research Foundation (DRF) undertakes the Research and development activities. DRF is engaged in a wide spectrum of research on ayurvedic and herbal products, organic substances, phytochemicals (plant derived medicines), tissue culture, foods, cosmetics, oral care and other personal care products. Dabur India Limited recently announced its entry into personal wash segment with the national launch of its new Vatika- Honey & Saffron Soap. This launch marks Dabur's entry into the Rs.47 billion Indian soap market. Vatika is one of the five master brands of Dabur India with a turnover of over Rs.1 billion and the distinction of being awarded "Super brand" in 2003-04. Important developments that could affect the company’s operations includes a downward trend in the domestic FMCG industry, rise in input costs, exchange rate fluctuations, significant changes in political and economic environment in India, environment standards, tax laws, litigation and labour relations. Balance Sheet of Dabur India Ltd. as on
(Rs. in million)
Profit & Loss Account of Dabur India Ltd. for
the year ending on (Rs. in
million)
Annexure
I Closing value of the S &
P CNX NIFTY and Dabur India Ltd. for the last one
year
Annexure II Technical Analysis Charts
Price
line END OF SECTION D Section E : Caselets (50 Marks) This section consists of questions with serial number 7 - 13. Answer all questions. Marks are indicated against each question. Do not spend more than 80 - 90 minutes on Section E. Caselet
1 Read the caselet carefully
and answer the following questions: 7. According to the caselet, what exactly is Insider Trading? Explain the mechanism through which Insider Trading takes place? (8 marks) < Answer > 8. What is the legal status of Insider Trading in India and how SEBI keeps a watch on Insider trading transactions? (8 marks) < Answer > The persons involved in the insider trading are questionable but not the insider trading itself. This can be viewed from various transactions involved in these companies. Promoters affirm on compiling with the corporate governance rules. Investment bankers’ states about there own compliance and their internal systems. So who are the real guilty! Take the stock of Adlabs Films, a company in entertainment sector. Adlabs is priced at Rs.162.05 on the National Stock Exchange as on June 1, 2005. In next ten days the scrip was trading at Rs.189.65, with a trading volume of 19 times compared to volume on June 1, 2005. (volume as on June 1, 2005 is 29,005 shares and volume as on June 10, 2005 is 5,50,578 shares). On June 29 it is trading at around Rs.200 with a volume of 10,99,549 shares. On the last of the month, Reliance Capital send notices to the stock exchange informing them about a decision for acquiring 51% stake in the Adlabs Films Ltd. On that day price zooms to Rs.241.45 with a volume of 30,99,256 shares and on the next day it went to Rs.281.70 with a volume of 64,21,675 shares. The major observation made here is that Nifty got up only 6.37% against Adlabs scrip, which jumped 49% in the same period. This is only one case but there are many cases like this. Ketan Parekh also rigged the price of Global Trust Bank’s (GTB) scrip in league with its promoters before the announcement of the decision to merge GTB with UTI Bank. SEBI has identified clear evidence of insider trading, price chains and circular trading in the stock exchanges. While a part of the money came from the promoters and brokers, a larger part was derived from illegally diverting depositors’ money from banks such as the Madhavpura Bank. But still a more clear and quiet investigation is needed in the insider trading cases on the part of Securities and Exchange Board of India. Read the caselet carefully
and answer the following questions: 9. Discuss the support and resistance level with the help of demand and supply theory and also explain how bulls and bears affect the support and resistance level. (8 marks) < Answer > 10. There are some principles to be kept in mind while applying support and resistance lines for trend analysis. Discuss these principles. (8 marks) < Answer > A technical analyst sits with a lot of charts to conclude patterns by viewing how a stock is being traded in a certain period of time. By employing complex statistical tools, analysts study the graph of stock price and its quantity traded over a period of time. After all this efforts an analyst expect the graph to tell about the increase or decrease in the price of the stock. Such type of analysis moreover looks in support of certain price levels in a stock’s performance in the past e.g., 52-week high and the 52-week low. These levels infer about the highest and lowest price of the security for the past one-year. The 52-week low is called the support level as it is generally believed to be the 'support' level below which the stock's price shouldn’t fall except there is something fundamentally wrong in the company. Simply, support is the floor level, below which the stock price cannot fall and resistance is a ceiling price level above which the price should not increase. When the price of the security break through a support or resistance line, the traders will drive the price to the new price level. When a resistance level is penetrated and successfully tested, it becomes a support level and vice-versa. Investors usually buy the stock at support line in anticipation of increase in prices and sell the stocks at resistance level expecting the price to come down. Mostly these support and resistance level are triggered through fundamental changes that varies with expectation and also through psychological factors. The foundation of most technical analysis tools is rooted in the concept of supply and demand. In almost all charts support and resistance level are the most popular. It is always wise to again take a note of new facts after the support /resistance level is broken. For example, if there is a breakout above the resistance level, one should again analyze the new trend and should consider new fundamental and then may think about selling the stock. This creates an observable fact that is referred to as "traders’ remorse": prices return to a support/resistance level following a price breakout. The trend of price line after this period is important. There is a possibility of two things here. Firstly, if the expectation is defensive then the price will move back to the earlier level and secondly, if the expectation is positive, then the price will continue in the same direction. Caselet
3 Read the caselet carefully
and answer the following questions: 11. A value of
beta explains the risk associated with a security. With respect to this
explain various types of beta values. (5 marks) < Answer > 12. Beta is a good tool for assessing the movement of stock based on the relationship between the return on the stock and the market. But there are some problems where only beta is used for determining risk of an investment. Discuss. (7 marks) < Answer > 13. The Beta of a security fails to correctly reflect the inherent risk during the period of economic slowdown and recession. Explain. (6 marks) < Answer > In the recent market run, there has been a high level of price volatility. If one has to watch out for the movement of the stock of the leading scrip then the most common way to measure this is by means of ‘beta’. Beta is a measure that tells about how much a stock has moved in relation to the index for a defined period of time. Beta value can be readily available from the various websites. Ideally the stock should be such, which can always beat the index. It should rise more when the market are bullish and falls less when market is in a bearish grip. So according to the risk taking ability of the individual, the stock should be selected. A proper strategy should be framed to invest in a portfolio based on the stock’s sensitivity to the market index. Investments that carry higher than average risks should offer the opportunity to earn much higher returns, but in reality, however, it is not very easy to strategic investments, which adhere to that principle. There are many variables that affect the stock return; moreover there is more than one way of calculating risk, thus making risk-reward assessment a complex exercise. Mostly all variables are based on past data and can provide little clue about future. An analysis of past beta across sectors does not provide enough evidence to suggest, that high beta stocks deliver better returns in rising market, or fall more steeply in falling market. This is primarily because beta values change rapidly based on market moods. Beta values are useful for positioning a portfolio based on your risk appetite and buying a stock based on beta alone is not a good idea. Investors can find the best use of the beta ratio in short-term decision-making, where price volatility is important. If you are planning to buy and sell within a short period, beta is a good measure of risk. However, as a single predictor in long-term investment, the beta has too many flaws. Careful consideration of a company’s fundamentals will give you a much better picture of the potential long-term risk. Beta is also useful in reducing the combined systematic risk of the portfolio. If an investor has a portfolio of highly volatile stock which had beta greater than 1 during the past one year, then it make sense to reduce overall portfolio risk by adding defensive stocks having beta less than 1. END OF SECTION E END OF QUESTION PAPER | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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