Corporate Finance Dabur

COURSEWORK FOR ASSESSMENT – CORPORATE FINANCE June 23, 2009
Bradford University School of Management

Full Time MBA 2008 – 09
Evaluation of Shareholder Value and Market Evaluation of Equity for
UB No: 08014043
Module Name: Corporate Finance
Module Leader: Patrick Barber
I certify the word count does not exceed more than the number of words mentioned: 3492
(Excluding References, Appendix, tables, name of graphs/figures/tables)
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Contents
1. Executive Summary.............................................................................................................................6
2. Introduction to the company...............................................................................................................6
3. Financial Highlights of the Company...................................................................................................7
4. Comparable Firms................................................................................................................................8
5. Share Holder Value..............................................................................................................................9
5.1 Total Shareholder Value (TSR).....................................................................................................9
5.2 Market Value Added (MVA).......................................................................................................10
5.3 Economic Value Added (EVA)....................................................................................................10
5.4 Dividend policy..........................................................................................................................11
5.4.1 Dividend Payout ratio...............................................................................................................11
5.4.2 Dividend Yield...........................................................................................................................12
6 Share Price Movement – Last 12 months..........................................................................................13
7 Equity Valuation................................................................................................................................14
7.3 Net Asset Value (NAV)...............................................................................................................14
7.4 P/E Ratio Valuation....................................................................................................................15
8 Discounted Cash Flow:.......................................................................................................................16
8.1 Expected Revenue growth.........................................................................................................16
8.1.1 Past growth performance..................................................................................................16
8.1.2 Industry Growth Rate.........................................................................................................17
8.1.3 Competitive Advantage and other factors................................................................................17
8.2 Operating Margin......................................................................................................................18
8.3 Depreciation..............................................................................................................................19
8.4 Taxation and interest.................................................................................................................20
8.5 Capital Expenditure...................................................................................................................20
8.6 Working Capital...............................................................................................................................22
8.7 Cost of Equity...................................................................................................................................23
8.8 Weighted Average Cost of Capital...................................................................................................23
8.9 Free Cash Flow (FCF) and Net Present Value (NPV).........................................................................23
8.10 Terminal Value...............................................................................................................................24
8.11 Sensitivity Analysis.........................................................................................................................24
9 Conclusion.........................................................................................................................................25
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10 Appendix........................................................................................................................................26
10.1 Financial Highlights of Marico group.............................................................................................26
10.2 Total Shareholder Value Comparison........................................................................................27
10.3 EVA calculation..........................................................................................................................27
10.4 Net Asset Value..........................................................................................................................28
10.5 Assumptions for NAV of Marico.................................................................................................28
10.6 P/E Ratio Calculation..................................................................................................................29
10.7 Forecast for Sales Revenue............................................................................................................29
10.8 Bases for growth rate....................................................................................................................30
10.9 Operating profit margin.............................................................................................................31
10.10 Capital Expenditure – Past 5 years (% of sale).......................................................................31
10.11 Working Capital – Past 5 years...............................................................................................32
10.12 Cost of Equity Calculation......................................................................................................32
10.12.1 Gordon Growth Model (GGM)..............................................................................................32
10.12.2 Capital Asset Pricing Model (CAPM).....................................................................................33
10.13 Weighted Average Cost of Capital.........................................................................................33
10.14 Terminal Value.......................................................................................................................34
10.15 Sensitivity Analysis.................................................................................................................35
10.15.1 Long term growth.................................................................................................................35
10.15.2 Discount factor.....................................................................................................................36
10.15.3 Sales Revenue.......................................................................................................................38
11. References...........................................................................................................................................41
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List of tables
Table 1 - Financial Highlights of Marico Ltd.................................................................................................8

Table 2 - MVA calculations for Marico.......................................................................................................10
Table 3 -Dividend Payout Comparison.......................................................................................................12
Table 4 - P/E Ratio Calculation for Marico.................................................................................................15
Table 5- Revenue growth rates..................................................................................................................17
Table 6 - Projected revenue growth pattern.............................................................................................18
Table 7 - Operating margin growth rate....................................................................................................19
Table 8 - Historic Depreciation calculations...............................................................................................19
Table 9 - Tax paid calculations for Marico.................................................................................................20
Table 10 - Projected Capital expenditure (As a % of sale).........................................................................21
Table 11 - Earnings after investment.........................................................................................................21
Table 12 - Projected Working Capital........................................................................................................22
Table 13 - Free cash flow for Marico.........................................................................................................24
Table 14 - Valuation of Marico..................................................................................................................25
Tables of Figures
Figure 1 - Shareholding Pattern of Marico...................................................................................................6

Figure 2 - Financial performance of Marico.................................................................................................7
Figure 3 - Total Shareholder Value comparison...........................................................................................9
Figure 4 - EVA comparison for the past 5 years.........................................................................................11
Figure 5 - Marico Stock Vs BSE and BSE FMCG index.................................................................................13
Figure 6 - Net Asset Value Comparison.....................................................................................................14
Figure 7 - P/E ratio comparison.................................................................................................................16
Abbreviations
AR – Annual Report
CAPM – Capital Asset Pricing Model
DCF – Discounted Cash flow
EPS – Earnings per share
FCF – Free cash flow
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GGM – Gordon Growth Model
HUL - Hindustan Unilever Limited
MVA – Market Value Added
NAV –Net Asset Value
NOPAT – Net Operating profit after tax
NPV – Net present value
P/E Ratio – Price/Earnings ratio
ROCE – Return on Capital employed
TSR – Total Shareholder Return
WACC – Weighted Average Cost of Capital
Y-o-Y – Year on Year
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1. Executive Summary
The key objective of the report is to determine whether the market has valued Marico correctly or not.
In the report we consider Marico last five years performance to determine the rate of return to the
share holders. The report also exhibits the application of three basic valuation methods namely the Net
Asset Value, Price Earnings Multiples and discounted cash flow to determine the future value of the
company in the perspective of shareholders and potential investors.
In the report, the price of the Marico equity is analyzed for the previous 12 months. In conclusion, the
final value of the equity arrived through different valuation techniques are recommended to the share
holder.
2. Introduction to the company
Marico Ltd is based in India and established in 1988, the company principal activities are to manufacture
and market fast moving consumer goods (FMCG). The company continues to be a family-owned
company with promoters and family owning 63.45% of the total shares of the company.
Figure 1 - Shareholding Pattern of Marico
(Source: Annual report, 2007-08)
The company deals in two segments, the consumer products and services. The consumer products
include hair care products, soaps, baby care products, coconut oil, hair oil and other edible oils. The
service segment includes skin care and ayurvedics treatment. Some of Marico brands are part of
everyday life in India.
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3. Financial Highlights of the Company
The company has shown a consistent year on year growth in terms of sales and net profit for the last
five years as indicated in the Figure 2 and in Table 1. The calculations are shown in Appendix 5. 1
(Source: Marico Ltd Annual Report 2007-08)
Figure 2 - Financial performance of Marico
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Table 1 - Financial Highlights of Marico Ltd
(Formula used for calculations is in Appendix 10.1)
As the figure 1 mentions the net profit and sales of the company are growing y-o-y. The company had a
zero debt till 2003-04 and then has started borrowing money. The company is on expansion mode, the
company is increasing its international presence and at the same time capitalizing on the skin care
market by trying to open skin care clinics. To support the expansion, the company is borrowing funds.
4. Comparable Firms
The FMCG sector is the fourth largest sector in the economy with a total size of US $ 18 billion as on
2007 and is expected to scale up to US$ 33 billion in 2015 (INBICS 2007). There are number of players in
the FMCG sector, however Dabur and HUL have been taken as competitors as they have similar
products. Other FMCG companies have diversified business such as tobacco and hotels. In respect to
HUL, the accounting period ends on 31 st December of the year. Thus, this period is compared to the
accounting period of Marico and Dabur which is on 31st of March.
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5. Share Holder Value
The following consists of the methods used to evaluate the true value of Marico and to ensure that the
company is been delivering value to its shareholders in the past 5 years.
5.1 Total Shareholder Value (TSR)
The company has been delivering shareholder value consistently. However, in the last two years there is
a drop in the TSR. This trend seems to be followed by both the competitors Dabur India and HUL for the
same period. The major reason for the drop in shareholder value was due to the increase in input prices
in 2007. The cost of palm oil, crude and packing charges had gone up during the period (Equity Master
2008).
250.00%
200.00% 191.72%
150.00%
135.76%
124.69%
110.47%
Marico Ltd
100.00% 89.62% Dabur India
82.10%
HUL
50.00%
16.63% 17.32%
7.98%
13.84% 14.86% 10.85%15.81%
-11.35%
0.00%
2003-04 2004-05 2005-06 2006-07 2007-08
-22.42%
-50.00%
Figure 3 - Total Shareholder Value comparison
In spite of the tough economic condition, the company has been consistently paying a dividend year on
year. The dividend has increased from 43% in 2003-04 to 66% in 2007. The calculations are in Appendix
10.2
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5.2 Market Value Added (MVA)
MVA compares the current value with the amount the owners have paid for. The MVA is the market
value of Invested capital minus the book value of Invested capital. According to Stern Stewart, this
method helps managers not only focus on the traditional accounting method but also concentrate on
the rewards for share holders (Gallagher and Andrew 2000).
A higher MVA indicates that the company has created wealth for its shareholders. By referring the table
2 below, it can be noticed that Marico is been creating wealth y-o-y and there is increase of 4485% in
the last five years.
(Source: Annual Reports 2003/04 – 2007/08)
Table 2 - MVA calculations for Marico
5.3 Economic Value Added (EVA)
The EVA relies on the concept of the cost of capital and is used to assess the value or wealth created by
a firm (Pike and Neale 2009). In other words EVA measures the difference between the company capital
and the cost of capital.
A positive EVA denotes that the company is creating share value for its share holders and the negative
EVA means that the company is destroying shareholder value.
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Marico -Economic Value Added (EVA)

140 132
120
100
79 Marico -Economic Value
80 Added (EVA)
60 46 51
38
40
20
0
2003-04 2004-05 2005-06 2006-07 2007-08
Figure 4 - EVA comparison for the past 5 years
(Source: Annual report 2007-08)
From Figure 4 it can be noted that Marico has been creating enormous value to its shareholders by
increasing its EVA from Rs 38 crores in 2003-04 to 132 crores in 2007-2008. Refer Appendix 10.3
5.4 Dividend policy
5.4.1 Dividend Payout ratio
The dividend payout ratio (DPR) calculates the percentage of the profit of the company given to the
shareholders through cash dividends. A low DPR may indicate that the company is using the profits to
reinvest in the business. Similarly, a high DPR may indicate that the company is in the phase of maturity
and may have less growth opportunities (Pike and Neale 2009).
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Table 3 -Dividend Payout Comparison
The DPR of Mario has been coming down for the last five years and is also less than its competitors as
mentioned in Table 3. The company regularly has been distributing the profits to its shareholders.
However, the company is on a growth mode and finds the need to conserve and re-invest the money
back into the business. The company has made seven acquisitions world over in the last 3 years (Marico
Annual report 2007-08).
5.4.2 Dividend Yield
The dividend yield (Table 3) of 1.04% is less than the industry average of 1.74 (Reuters 2009). This is
attributed due to the company policy of re-investing money into the business (Mario Annual Report
2007-08).
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6 Share Price Movement – Last 12 months

Marico trades in the Bombay stock exchange which is one of the oldest stock exchanges and is in
business for the past 133 years. The BSE can be considered as Semi strong market. Pike and Neale
(2009) mention that in a semi strong market, the stocks react rationally to both past performances and
publicly announced information.
Marico Vs BSE Sensex Marico Vs BSE FMCG sector
Figure 5 - Marico Stock Vs BSE and BSE FMCG index
(Source: Moneycontrol 2009)
In spite of the current economic condition, Marico has outperformed both the BSE and BSE FMCG index
(Refer Figure 5). Marico has stood its grounds in spite of the FMCG index going down by -16.53%
(Moneycontrol 2009).
In the last 12 months the price of the input materials has been very volatile. FMCG companies including
Marico require crude oil for manufacturing some of their produces. Crude oil has skyrocketed during the
year, touching $140.13 a barrel and going as low of $34.49(OPEC 2009). This has been reflected in the
share price, in the month of June the price of oil had started climbing and as a result the prices of the
stock has been falling. Similarly as the price of crude oil reduced during the month of January 2009, the
prices have started moving northwards.
At end of January 2009, the Indian stock market rebounded along with the world markets. This reason
along with reduction input cost during the end of 2008 helped Marico share price to climb in a
systematic manner. The share price of the company increased by 6.75% on April 22nd, 2009 due to better
than expected results of 9% increase in the quarterly net profit to Rs 44.41 crores (Reuters 2009). On
18th May 2009, the Indian election results were declared and the government chosen have indicated
their willingness to push forward economic reforms. The market rose by 17.01% on a single day pushing
the regulators to shut down operations for the day. Surrounded by positive news, the price of Marico
shares is expected to continue its upward journey.
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7 Equity Valuation
The three basic valuation methods used are
 Net Asset Value ( NAV )

 Price Earnings (P/E) Ratio
 Discounted Cash Flow
7.3 Net Asset Value (NAV)
NAV is the total value of the company assets less the liabilities. To value, net asset value is divided by the
number of the shares (Money Term 2009). The NAV based on balance sheet figures indicate the NAV for
Marico is Rs 394.91 crores, Refer Appendix 10.4 .However, the NAV has its disadvantage, most book
values are based on historical prices and not market prices in the case of fixed assets, Refer Appendix
10.5 Thus, the NAV method of valuation does not taken into account the earning capacity of the fixed
assets. The true value depends on how close the net assets are to the market value (Chandra 2008).
However from 2011, India will move to the IFRS, thus the concepts of fair value accounting will be done
from that period onwards which will allow the value the company fairly (Moneycontrol 2009).
NAV
10 9
9
8
7 6.07
6
Price In Rs
5 4.3 NAV
4
3
2
1
0
Marico Dabur HUL
Year 2007-08
Figure 6 - Net Asset Value Comparison
(Source: Respective Annual Accounts 2007-08)
The implied value of the Marico share through the NAV is Rs 6.07 which is less compared to the yearend
(31st March 2008) price of Rs 67.25 and thus the valuation through NAV is undervalued.
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7.4 P/E Ratio Valuation
The P/E ratio informs about how much an investor would pay for each unit of earnings. A high P/E ratio
suggests that investors are expecting earnings growth in the future. If this ratio is too high, it means
either that investors are expecting higher earnings for shareholders or higher earnings growth rate for
the company.
To determine whether a particular P/E is high low, we need to consider the company’s growth rate
along with the competitors P/E ratio. The P/E ratio of Marico is in Table 4
Price – Earnings Ratio for Marico (2007-08)
Profit after Tax (in crores) = Rs 169.1 Crores

No of Ordinary Shares = 60.90 crores
Earnings per Share = 169.1/60.90 = Rs 2.78
Share price as on 31.03.2008 = Rs 67.25

PE Ratio = Current Market Price / Earnings per share
PE Ratio = 67.25/2.78 =24.20
Value of Equity = P/E Ratio * Profit after Tax

Value of Equity based on P/E Ratio = 24.20 *169.1 = Rs 4092.22 Crores
Table 4 - P/E Ratio Calculation for Marico
The present P/E multiple of 2.78 times considering the market price (Rs 67.25) of 31 st March 2008 is
considered reasonable in the current turbulent times. When compared with the competitors in the
Figure 7 for 2007-08. (Calculations for competitors P/E in Appendix 10.6)
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P/E Ratio
35 32.67
30 28.54
25 24.2
20 P/E Ratio
15
10
5 3.34
0
Industry Average Marico Dabur HUL
Figure 7 - P/E ratio comparison
(Source: Annual Reports of respective companies 2007-08)
Marico P/E ratio 24.2 is much higher than the industry average; however the ratio is far less compared
to that of its competitors. The value of equity obtained in this method is higher than the NAV method
and is Rs 40922.22 crores.
8 Discounted Cash Flow:
The DCF method of valuation is used to calculate the future earnings of the company. The DCF
determines the value by calculating the present value of the business future cash flows (Harvard
Business School et al 2002). To arrive at an accurate valuation, a consideration of the ongoing
investment needs, expected revenue and operating cash flows are to be done. The cash available after
net of investment outlay is referred as free cash flow (Pike and Neale 2009).
8.1 Expected Revenue growth

8.1.1 Past growth performance
The sales revenue growth for Marico in the last five years is 16.5%. In the current period of 2007-08, the
company recorded a 22.47% growth from the last year. However it was down from the 2006-07 growth
of 36.10%,
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Table 5- Revenue growth rates
8.1.2 Industry Growth Rate
In a study performed by Federation of Indian chambers of commerce and Industry (FICCI), they have
revealed that the sector is been growing at 16% in the period 2007-08. This is lower compared to
Marico’s growth.
8.1.3 Competitive Advantage and other factors
In the past three years the company has achieved a top line CAGR of 29% making the company the
fastest growing FMCG Company in India (Annual Report 2007-08).The major reason why FMCG industry
is expected to grown faster in the years to come is because of rural India spending and the FMCG sector
cannot be affected much by the crisis, as the demand for the essential products will continue in spite of
recession (Financial Express 2009).
Thus, with several factors (Appendix 10.7) and the global economy rising from the ashes, the growth
rate can be expected from 22.47% to about 25% in the next year. Several chiefs of FMCG companies
have mentioned that expected the FMCG sector is to grow at 25% and over the next few years at a 10%
-20% growths for companies (Financial Express 2009).
The following table calculates the future revenue growth fixed percentage year on year.
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Table 6 - Projected revenue growth pattern
Refer Appendix 10.8 for the reasons of the growth rate.
8.2 Operating Margin
The operating cost margin for Marico is 89.30%, however it is still higher to its competitors ( Appendix
10.9) .The operating costs have been reducing for the last 5 years. The company was able to bring down
the operating cost in spite of the input materials sky rocketing during the corresponding period.
In Figure 2 shows the revenue mix, the majority of the revenue (32%) comes from coconut oil. Copra,
the main ingredient for coconut oil forms nearly 40% of the raw material cost has seen a decrease in its
prices from Rs 3750/quintal in late 2006 and to about Rs 3350/quintal in the start of 2008 (Kotak
Securities 2008). Similarly, the packing cost of Marico constitutes to 8% of consolidated revenue, the
bulk of packing cost is plastic and this price is also on a downward trend. Similarly the major expense for
FMCG companies is advertisement, it is learnt that due to recession, the prices have come down by 15-
20% (Morgan Stanley 2009).
The immediate effects of the price drop can be seen in 2009 and parts of 2010. As the world economy is
picking up and prices of oil are on an upward trend, the costs may go up. For the years to come, the
operating margin will follow the trend of the previous 5 years. Therefore, the forecasted operating cost
is in table 7
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Table 7 - Operating margin growth rate
8.3 Depreciation
Depreciation and Amortization for the last 5 years is 15.33% (Refer table 8). This rate may be considered
high, but it should be noted that Marico has purchased other brands/companies in the market (Annual
report 2007-08), thus along with this comes trademarks and copyrights which needs to be amortized
over a period of time.
Table 8 - Historic Depreciation calculations
Thus, the depreciation rate can be assumed at 11.95% (base rate) for the next 3 years and gradually the
depreciation will decrease to an average of 10% when the company stops its acquisition mode.
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8.4 Taxation and interest
The tax rate in India remains around 30% for a domestic company (International Tax Review 2008).
However the Indian government is in the favour of reducing the taxes. The reason behind the reduction
is due to the increased compliance in direct tax collections, also India is one of the countries with
highest tax rates in the world. To keep India competitive, the tax rates may be reduced in the future
(Economic times 2008).
Marico was a debt free company till 2004. Then to support its major expansion plans (8 acquisitions),
the company has been borrowing heavily in the following years. The debt equity is nearly 1:1.2 which
indicates the risk level is high .This debt needs to be paid off during the coming years. Thus, the interest
payments for the years to come will increase as the debt has increased significantly. (This is included in
the operating costs).
Table 9 - Tax paid calculations for Marico
8.5 Capital Expenditure
The capital expenditure for Marico in the last year was 4.70% compared to a five year average of
16.77%. Out of 991 crores spent in the last five years, Rs 580.7 crores have spent in the period 2005-07,
the reason for the low capital expenditure in the current year could be attributed to recession. However
the company continues to be aggressive on the investment phase with opening up of Several Kaya Skin
care clinics and the expansion into the international markets going to take place in the years to come
(Annual Report 2007-08). There is a link between sales and capital expenditure. Thus with the opening
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of more stores by 2010 end, a rise in capital expenditure is forecasted ( Refer table 10) and there will be
a decrease in the years to come, this can attributed the business cycle ( Begg and Ward 2008).
Table 10 - Projected Capital expenditure (As a % of sale)
Refer table for projected earnings after investment cost
Table 11 - Earnings after investment
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8.6 Working Capital
The working capital refers to amount of funds required to run day to day operations. Marico’s working
capital in the past has increased in correspondence to the sales (Refer Appendix 10.11). It can be
assumed for the future too, the working capital will increase or decrease in correspondence with the
sales. The working capital in the current year is high due to the increase in cash balance. The company
has mentioned in the AR 2007-08, that in the years to come it will use the working capital in an efficient
manner. Thus, it is predicted that the company will use the working capital in a more efficient manner.
For Assumption purpose, 2 months of Operating costs are taken as the working capital, the reasons are
below
 Credit period for purchase of goods and services – 1 month (+1)

 Conversion of Raw Material  WIPFinished good and shipping to the stock dealers – One
month (-2)
 Credit period for Sales (Debtors) – one month (-1)
 Total = 2 months working capital is required (+1-2+1 =2)
Table 12 - Projected Working Capital
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8.7 Cost of Equity
The cost of equity refers to the return that a company or shareholders seek on their investments (Pike
and Neale 2009). There are two methods to calculate cost of equity, they are GGM and the other
method is CAPM. (Refer Appendix 10.12)
The GGM method is used as indicator of future dividend growth based on the past dividends (Puxty et al
1988).This method is suitable for companies who are paying a stable dividend, however for companies
like Marico where the company is holding on to its reserves for future investment, this method may not
be the best method to calculate the returns expected.
The CAPM method has its advantages over the GGM model, the GGM is based on past rate of growth
and accepting the validity of the market valuation of the equity. Sometimes, the past rates may not be
suitable for future. The CAPM defers with GGM and does not require growth projections, nor does it
depend on the instantaneously efficiency of the market (Pike and Neale 2009).
In this case, the CAPM method is considered due to the fact that CAPM includes the Market Risk factor
in the calculations and is not based on the past performance of the company, which GGM relies on. Thus
the Cost of equity from the CAPM model is 13.71%.
8.8 Weighted Average Cost of Capital

Refer appendix 10.13
8.9 Free Cash Flow (FCF) and Net Present Value (NPV)
Free cash flow can be defined as the amount of cash generated from inflow less outflow (Pike and Neale
2009). For forecasting purpose the Discount factor is assumed at 13% (this is attained through WACC).
Table 13 below shows the FCF and NPV of Marico. The NPV of the company is Rs 2675.23
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Table 13 - Free cash flow for Marico
8.10 Terminal Value
The company is growing y-o-y and is having aggressive plans for the future and from a manufacturing
company; they are venturing into services such as Kaya skincare clinics. The company is also increasing
its international presence (Annual Report 2007-08).Though the country grew at nearly 9%, India Braved
the global recessionary trend and managed a 6.7% growth in 2008-09(Business Standard 2009).IMF
mentioned that India will be able to achieve 7% growth in the forthcoming years (Financial Express,
2009).The economy is picking up, however it is safe to be assumed that India growth would be 5%
beyond 2018.The terminal value for the firm is Rs 15429.02 crores and the enterprise value is Rs
18,104.24 crores. Refer Appendix 10.14
8.11 Sensitivity Analysis
Pike and Neale (2009) mention that the sensitivity analysis is used to isolate and assess the potential
impact of risk on a firms value.
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There are different factors which may affect the valuation of the company. The different factors are as
follows:-
 Long term growth rate

 Discount factor
 Sales Revenue
The analysis helps monitor the different type of outcomes to possible changes in the above factor. The
above are 3 factors are considered for sensitivity analysis in Appendix 10.15
9 Conclusion
The valuation based on different methods has given different values for the company. The values are
given below in table
Valuation Method Used Equity Value in Rupees
Net Asset Value Rs 394.91 Crores

Price/Earnings (P/E) Ratio Rs 4092.22 Crores
Discount Cash Flow (DCF) Rs 18,104.24 Crores
Table 14 - Valuation of Marico
The value of Rs 394.91 crores obtained through the NAV method is based on the historical prices used in
the balance sheet. There is less information in the market about the current value of the asset. The NAV
also does not take into account the potential earnings of the company. However, the amount of Rs
394.91 crores act as the minimum amount that the company can expect in case the company is being
dissolved.
Through the P/E method, the company is valued at Rs 4092.22 crores. The P/E ratio of the company is
24.20 and is less than its competitors .This method; similar to the NAV does not take into account the
future earnings. The P/E method relies a lot on EMH, which can be unpredictable and some news about
the stock can increase or decrease the valuation of the company. Thus, this method of valuing the firm
may not be very useful.
The DCF method is based on various estimates about the company’s growth aspects in the future along
with its earning potential. The DCF method helps to predict the future cash flows and it discounts the
risk factors involved and measures the fundamental value of the asset.
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The DCF value estimates the company value at Rs 18,104.24 crores which translates to Rs 297.27 per
share. However, the share price as on 18 th June 2009 is Rs 72.40, thus the current market price does not
reflect the true earning potential of the company. The company is very aggressive and aims to increase
its revenue through acquisitions and entering new markets world over (Annual Report 2007-08); along
with the Indian economy growing, the stock will be a good investment.
10 Appendix
10.1 Financial Highlights of Marico group.
Formulas used
Profit Margin
Profit Margin = (Profit before Tax in thousands / Turnover in thousands)*100
Liquidity Ratio (Current)
Liquidity Ratio = Current Assets / Current Liabilities
Liquidity Ratio (Acid test)
Liquidity (Acid Test) Ratio = (Current Assets - Excluding Inventories)/Current Liabilities)
Gearing Ratio
Gearing Ratio = (Long term Liabilities / (Share Capital + Reserves + Long term Liabilities))*100
ROCE
ROCE = (Earnings before Interest and Tax/ (Share Capital + Reserves + Long term Liabilities))*100
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10.2 Total Shareholder Value Comparison
Note: The opening value is taken as 1 st April and the closing value is taken on 31 st march for the 5 years
respectively
10.3 EVA calculation
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(Source: Annual Reports 2007-08)
10.4 Net Asset Value

Formula for NAV
NAV = Fixed Assets + Current Assets – Current Liabilities – Long term Debts
Marico
NAV = 257.31 + 528.10 – 255.96 – 134.54 = 394.91 Crores

No of ordinary Share = 60.90 Crores
Value per share =394.91/60.90 = Rs 6.48
Dabur India
NAV = 465 + 774 – 458 – 11 = 771 Crores

No of ordinary shares = 86.40 Crores
Value per share = 771 /86.40 = Rs 9
HUL
NAV = 1522.50 + 3277.41 - 3837.09 - 25.52 = 937.30 Crores

No of ordinary shares = 217.75 Crores
Value per Share =937.30/217.75 = Rs 4.30
10.5 Assumptions for NAV of Marico

The market value of the company differs from the book value, for the following reasons
 The book value of the asset is based on the historical cost less depreciation, however the value
does not take into account inflation, which influences the market value
 Assets become obsolete even more they are fully depreciated
Assumptions for adjusting book value to reflect replacement cost
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(Source: Chandra 2008)
10.6 P/E Ratio Calculation
PE Ratio of Marico is calculated in Section 7.4 P/E valuation
P/ E Ratio = Market price as on 31st March 2008 / Earnings per share

Value of Equity Derived = P/E Ratio * No of shares Outstanding
Dabur India
P/E Ratio = 109.9/ 3.85 = 28.54

Value of Equity Derived = 28.54 * 333 = Rs 9505.36 Crores
HUL
P/E Ratio = 228.7/ 8 = 32.67

Value of Equity Derived = 32.67 * 217.75 = Rs 7113.89 Crores
10.7 Forecast for Sales Revenue
The company has built a strong portfolio enabling increase in products with high margin. Some of the
products with market share are given below.
The company expects that the Parachute band which contributes nearly 40% to the sales will increase
further by 6 to 8%. Saffola, the second flagship product is expected to grow another 15%. The hair oils
are expected to grow at 16%. Apart from the domestic market, the company is planning to increase its
international presence. The company is also expecting an increase of 20% in the international market
(AR 2007-08).
Considering the past performance (22.47%) and the current growth estimation, we can estimate the
company can grow between 25% - 30% in the next three years. The growth is supported by the following
factors
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 Decrease in input materials

 Marico’s products control 82% in the perfumed coconut oil categories and expect a 2% increase
in the revenue from these products. (Kotak Securities 2008)
 New products targeting the urban youth with high spending ability.
 The company is open to acquisitions, from the past acquit ions, the acquired companies have
contributed 14% to the growth
 Reduction in raw materials prices during the year. However prices of the products have not
been reduced, thus the margins are increasing.
 The company also provides skin care through its Kaya clinics. The company is a high margin and
the company has about 48 clinics in December 2007 and hopes to establish 93 clinics by FY10.
(Source: Kotak Securities 2008)
10.8 Bases for growth rate
Based on Marico past performance (Refer Table 5) and future plans of expansion in the world
market and launch of several new products, we can be assured that the company will continue to
grow. Based on industry views, it is expected the industry will grown at 25%, the company is already
by 22.47 in the current year, thus for the next year 25% is taken as the growth rate and FMCG chiefs
have mentioned that the companies would grow at 10% y-o-y(Financial express 2009).
However, to take a more cautious approach, for the next year the company is expected to grow at
25% and continues to grow for 3 years. Then the company reaches the maturity stage and the
growth rate stabilizes and then its growth rates starts getting lower due to competition. This method
is similar to the business cycle.
It is predicted that at the end of the 10 year, the growth will be at 12.51%. FMCG sector does not get
affected by the recession as most of the products are required for daily life. The growth rate for the
10th year is justified as Marico competitor HUL has been in the business for 75 years and continues
to grow at 13.83 (Refer table below).However the market may get saturated due to the number of
players and in the 10 years there may be no new set of people the company can target (Example:
Rural India).
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10.9 Operating profit margin
Comparison of the Operating Margin for the company and its competitors
10.10 Capital Expenditure – Past 5 years (% of sale)
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10.11 Working Capital – Past 5 years
10.12 Cost of Equity Calculation
10.12.1 Gordon Growth Model (GGM)
Marico 2003-04 2004-05 2005-06 2006-07 2007-08

Dividend paid 0.43 0.54 0.62 0.7 0.7
Percentage increase 26% 15% 13% 0%
Growth Rate = (1+g) ^n= Dn/Do
Thus,
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(1+g)=( Dn/Do)^1/n
(1+g)= (.70/.43)^1/5
G= 1.10236-1
G= 10.236%
Cost of Equity is [Ke] = [Do(1+g)/MV(Ex Dividend) +(g)]
Do (DPS for the base year -2008) = Rs 0.70

Growth rate : 10.236%
MV (as on 31st March 2008) = 67.25
MV (Ex Div) = 67.25-.70 = 66.55
= [.70*(1+.10236)]/66.55+.10236
=.113955
=11.40%
10.12.2 Capital Asset Pricing Model (CAPM)
Cost of equity, Ke = Rf + b (ERP)
Where Rf is,
Risk free rate = 7.11% (Source: Reserve Bank of India 2009)
Where b is,
Beta for 2008 = .60 (Source : Business Standard 2008)
Where ERP is,

Equity risk premium=11% (Source: Damodaran 2009)
Ke= 7.11+. (60*11) = 13.71%
10.13 Weighted Average Cost of Capital
WACC = Cost of equity * Equity/ (debt + Equity) + Cost of Debt (1-tax) (Debt / debt +equity)
The cost of equity obtained through the CAPM model is preferred over the Gordon growth model, the
reason why the CAPM model is considered is because the model takes into account the market risk. The
GG M model takes dividends of past years and neglects the risk analysis. Hence the cost of equity (CAPM
model is 13.71%
For 2007-08,
No of ordinary Share =609,000,000

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Market value of equity = No of shares * Share price

609,000,000* 67.25 = Rs 40,955,250,000
Net debt = (Secured Loan and Unsecured loan – Cash – Current investment)
(134.54+223.40 – 75.28 -0.1)
Net Debt = 282.65 Crores
Total Debt/ (Equity + debt) = 53%

Equity/ (Equity + Debt) = 47%
Tax rate for Marico = 30% (International Tax Review 2008),
Interest rates have gone up during the years, however due to recession, the rates have dropped. But
with the economy picking up, it is expected to go higher; this is evident through the prime lending rates.
Cost of Debt (On a Tax free basis) (Kid) = [(I) (1- tax rate)] / [Market value – Interest]
The effective rate paid by Marico in the last five years would correspond to the cost of debt. By looking
at the table below, it is estimated that t
Rs in crores 2003-04 2004-05 2005-06 2006-07 2007-08

Interest Paid 2.56 3.34 6.37 23.87 30.52
Net Debt Paid -22.97 20.61 198.33 207.95 282.65
Tax Rates (% paid on
taxable income 9% 6% 11% 25% 18%
Interest % -11% 18% 3% 10% 10%
Average Interest on
Debt 6%
Note: The Industry had availed several tax benefits by setting up the factory in areas
which had a tax holiday (Business Line 2006). The company has set up factories in Goa
and Pondicherry where the government is giving it tax benefits and that is the reason the
company is paying lower taxes. However the taxes are increasing in the years due to
inorganic and organic growth in manufacturing facilities which have no tax allowances
WACC
= (282.65/4095.53+282.6)*6(1-30) + [13.71(4095.53/4095.53+282.65)
=.064*1.8+13.71*.935
WACC = 12.94% => 13%
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10.14 Terminal Value
The terminal value depends on the long term of the cash flow for the company after the 10 year period
(2017-2018). Braving the global recessionary trend, India managed a 6.7% growth in 2008-09(Business
Standard 2009).IMF mentioned that India will be able to achieve 7% growth in the forthcoming years
(Financial Express, 2009).The economy is picking up, however it is safe to be assumed that India growth
would be 5% beyond 2018.
Terminal Value
Terminal Value = Final Year cash flow *(1+ Long term cash flow growth rate)/(Discount factor –
Long term cash flow growth rate
Terminal Value = 1175.54 * (1+0.05)/ (0.13-0.05)

Terminal Value = Rs 15429.02 crores
Enterprise Value: Net Present Value + Terminal Value

Enterprise Value: 2675.23 +15429.02 = Rs 18,104.24 crores
10.15 Sensitivity Analysis
The table below indicate the enterprise value of the company
Enterprise Value
Worst Case Best Case
Factor Scenario Scenario
Rs in Crores Rs in Crores

Growth Rate 6143.07 8454.97
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Discount Rate 4703.5 6745.83

Sales Revenue 2512.96 6452.83

The workings are given below in the appendix 10.15.1- 10.15.3
10.15.1 Long term growth
The growth for India predicted beyond 2018 is 5%. A change in the growth rates could cause a major
change in the enterprise value of the firm. Prior to the recession, India was growing at 9% per annum.
However, in spite of recession India grew at 6.25% and was one of the few countries which were least
affected by the recession.
After 2018, India’s growth rate is predicted at 3% in the worst economic conditions and 7% at the most
favourable economic condition
Worst Case Scenario
Present Value = Cash Flow /(r-g) [Source: Money terms 2009]

Where cash flow = Rs 1175.54 crores
r = Discount Rate =13%
g = Growth rate after final year (in the worst case scenario) = 3%
Present Value in the 10th year = 1175.54 / (.13-.03) = Rs 11,755.4 Crores
Terminal Value = Rs 11755.4.42*.295 = Rs 3467.84 Crores
Enterprise Value = NPV + Terminal Value = 2675. 23+ 3467.84 = Rs 6143.07 Crores
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Best Case Scenario

g = Growth rate after final year (in the Best case scenario) = 7%
Present Value in the 10th year = 1175.54 / (.13-.07) = 19,592.33
Terminal Value = Rs 19592.33*.295 = Rs 5779.73 Crores
Enterprise Value = NPV + Terminal Value = 2675. 23+ 5779.73 = Rs 8454.97 Crores
10.15.2 Discount factor
Worst Case Scenario
The discount factor is the most important factor which can affect the NPV. The company has a debt of
53%, the company to increase its international presence and open of more skin care clinics may need to
have more debts. Thus the rate can be taken @ 16%.
Worst Case Scenario

g = Growth rate after final year = 5%
Present
UB Value in the 10th year = 1175.54 / (.16-.05) = Rs 10,686.72 Crores
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Terminal Value = Rs 10,686.72*.226 = Rs 2415.52 Crores
Enterprise Value = NPV + Terminal Value =2288.29+2415.52 = Rs 4703.50 Crores

Best Case Scenario
In case the company stops its acquisition mode and pay back the debts in the year. The discount factor
will reduce. It can be assumed the discount factor to be @ 7%
Best Case Scenario

g = Growth rate after final year (economy) = 5%
Present Value in the 10th year = 1175.54 / (.07-.05) = Rs 5877.7 crores
Terminal Value = Rs 5877.7*.508 = Rs 29,859.71 Crores
Enterprise Value = NPV + Terminal Value = 3759.96 + 2985.87 = Rs 6745.83 Crores
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10.15.3 Sales Revenue
Another factor which can influence a company valuation to be overvalued or under estimated is the
sales growth figure.
The worst growth rate the company can have during the end of the 10 year is 9%. Thus, the % of
increase is kept at 9% constantly. The cash flow for 9% at the end of the 10 th year is below
Worst Case Scenario

g = Growth rate after final year (of the economy) = 5%
Present Value in the 10th year = 384.57/ (.13-0.05) = Rs 4807.125
Terminal Value = Rs 4,807.125*.295 = Rs 1418.10
Enterprise Value = NPV + Terminal Value =1094.86+1418 = Rs 2512.96 Crores
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Best case Scenario
According to a research done by the Associated Chambers of Commerce and Industry in India, rural
areas are propelling the demand for FMCG goods. The study also mentions 10,000 villages out of
600,000 villages in India presently have access to the goods of FMCG companies (RNCOS 2009). Thus a
growth of 20 % at end of the 10 th year can be assumed
Best case Scenario

Where cash flow at = Rs 1147.79 crores
g = Growth rate after final year =5
Present Value in the 10th year = 1147.79/(.13-.05) = Rs 14347.37
\
Terminal Value = 14347.37*.295 = Rs 4232.47
Enterprise Value = NPV + Terminal Value =2220.36+4232.47 = Rs 6452.83
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11. References
Business Line (2006).’Marico shines on performance’.

http://www.thehindubusinessline.com/2006/08/01/stories/2006080103021700.htm [ Accessed on
16.06.2009].
Business Standard (2008).’ Angel Broking- Risk free rate’. http://www.business-

standard.com/pdf/marico-ru4qfy2008-280408.pdf [ Accessed on 12.06.2009]
Business Standard(2008).’Emkay Research: Marico Ltd’. http://www.business-standard.com/pdf/marico

%20q408_update.pdf [ Accessed on 14.06.2009]
Business Standard(2009).’ India GDP up 6.7% in FY09 despite slow industry growth.’
http://www.business-standard.com/india/news/gdp-for-q4-is-58-vs-53/63146/on [ Accessed on
15.06.2009]
Chandra.P. (2008).’Financial Management – Theory and Practice, 7 th Edition’. Tata McGraw- Hill
Publications.
Dabur India Ltd (2009).’Annual reports’. http://www.dabur.com/en/Investors1/index.asp [Accessed on

16.05.2009]
Damodaran online (2009),’Country default spreads and Risk premiums’.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html [Accessed on
12.06.2009]
Economic Times (2008).’Lower Corporate tax’.

http://economictimes.indiatimes.com/Editorials/Lower_corporate_tax/articleshow/2670645.cms
[Accessed on 16.06.2009].
Equity Master (2008),’FMCG outlook 2008’. http://www.equitymaster.com/detail.asp?

date=1/9/2008&story=2 [Accessed on 18.05.2009]
Financial Express (2009), ‘FMCG co chiefs expect double-digit growth in Q3’.

http://www.financialexpress.com/news/fmcg-co-chiefs-expect-doubledigit-growth-in-q3/407057/%20. [
Accessed on 01.06.2009]
UB No: 08014043 41 of
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Financial Express(2009).’IMF projects GDP growth’. http://www.financialexpress.com/news/imf-

projects-gdp-growth-at-6.25/436351/ [ Accessed on 16.06.2009]
Gallagher, T. J., and Andrew,J.D. (2000).’Financial Management: Principles and Practice’. Freeload Press
Inc, pp. 99-104.
Harvard Business School, Luecke , R. And Hayes, S.L., (2002). ‘Finance for managers’. Harvard Business
Press, pp 180-181.
Hindustan Unilever Limited (2009),’ Annual Reports’.

http://www.hul.co.in/investor/annual_report_index.asp [Accessed on 16.05.2009]
INBICS (2007),’ FMCG Sector report’.

http://www.inbics.co.kr/reference/Final_Reports/INBICS_FMCG_Report.pdf [ Accessed on 27.05.2009]
International Tax Review (2008). ’International Companies slam India’s dual tax rate ’.
http://www.internationaltaxreview.com/?
Page=9&PUBID=210&SID=695088&ISS=24209&GUID=589B8BD9-4DFF-4335-93C9-32FC06DFF16E
[Accessed on 31.05.2009]
Kotak Securities (2008).’Kotak Private Client Research: Marico’.

http://www.kotaksecurities.com/download/STOCK%20IDEAS.pdf [Accessed on 31.05.2009]
Live Mint – WSJ (2009),’To hedge risk, Dabur tap overseas commodity exchanges’.
http://www.livemint.com/2009/04/23214200/To-hedge-risk-Dabur-Emami-ta.html [Accessed on
19.05.2009]
Marico Ltd (2009).’Annual Reports’. http://www.marico.com/investor_relations/index.html. [ Accessed

on 16.05.2009]
Moneycontrol (2009).’ Marico compare with Index’.

http://www.moneycontrol.com/stocks/company_info/compare_indice.php [ Accessed on 20.05.2009]
Moneycontrol (2009).’Is India Inc ready for IFRS? http://www.moneycontrol.com/india/news/cnbc-tv18-

comments/is-india-inc-ready-for-ifrs/394319 [ Accessed on 27.05.2009]
Moneyterms (2009). ‘DCF Valuation’. http://moneyterms.co.uk/dcf/ [Accessed on 17.06.2009]
Morgon Stanley (2009).’Marico Limited: High quality Local Jewel with Strong Growth Visibility’. Morgon
Stanley Research Asia/Pacific. Dated 04.03.2009.
Money Term (2009).’NAV’. http://moneyterms.co.uk/nav/ [Accessed on 20.05.2009]
Opec (2009).’ Opec Basket Prices’. http://www.opec.org/Home/basketDayArchives.aspx [ Accessed on

20.05.2009]
UB No: 08014043 42 of
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Pike,R. And Neale,B. (2009). ‘Corporate finance and Investment – 6 th edition’. Pearson Education
Limited, Essex.
Puxty,A.G., Dodds,J.C., and Wilson,M.S. (1988).’Financial management: method and meaning’.VNR

Series,pp 95.
Reserve Bank of India (2009).’Annual Reports’.

http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=881 [Accessed on 12.06.2009]
Reuters (2009).’ Ratios’. http://www.reuters.com/finance/stocks/ratios?symbol=MRCOf.NS [Accessed

on 20.05.2009]
Reuters (2009).’India Hot stock : Marico extends gains on Q4 performance ‘.

http://uk.reuters.com/article/motoringAutoNews/idUKBOM17965120090422 [Accessed on 20.05.2009]
RNCOS (2009).’FMCG Demand Surging in Rural India’. http://www.rncos.com/Blog/2009/04/FMCG-

Demand-Surging-in-Rural-India.html [ Accessed on 16.06.2009]
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COURSEWORK FOR ASSESSMENT – CORPORATE FINANCE June 23, 2009

Bradford University School of Management

Evaluation of Shareholder Value and Market Evaluation of Equity for

Module Name: Corporate Finance

Module Leader: Patrick Barber

Table 1 - Financial Highlights of Marico Ltd.................................................................................................8

Figure 1 - Shareholding Pattern of Marico...................................................................................................6

CAPM – Capital Asset Pricing Model

DCF – Discounted Cash flow

EPS – Earnings per share

FCF – Free cash flow

GGM – Gordon Growth Model

HUL - Hindustan Unilever Limited

MVA – Market Value Added

NAV –Net Asset Value

NOPAT – Net Operating profit after tax

NPV – Net present value

P/E Ratio – Price/Earnings ratio

ROCE – Return on Capital employed

TSR – Total Shareholder Return

WACC – Weighted Average Cost of Capital

Y-o-Y – Year on Year

2. Introduction to the company

Figure 1 - Shareholding Pattern of Marico

(Source: Annual report, 2007-08)

3. Financial Highlights of the Company

(Source: Marico Ltd Annual Report 2007-08)

Figure 2 - Financial performance of Marico

Table 1 - Financial Highlights of Marico Ltd

(Formula used for calculations is in Appendix 10.1)

5. Share Holder Value

5.1 Total Shareholder Value (TSR)

Figure 3 - Total Shareholder Value comparison

5.2 Market Value Added (MVA)

(Source: Annual Reports 2003/04 – 2007/08)

Table 2 - MVA calculations for Marico

5.3 Economic Value Added (EVA)

Marico -Economic Value Added (EVA)

Figure 4 - EVA comparison for the past 5 years

(Source: Annual report 2007-08)

5.4 Dividend policy

5.4.1 Dividend Payout ratio

Table 3 -Dividend Payout Comparison

5.4.2 Dividend Yield

6 Share Price Movement – Last 12 months

Marico Vs BSE Sensex Marico Vs BSE FMCG sector

Figure 5 - Marico Stock Vs BSE and BSE FMCG index

(Source: Moneycontrol 2009)

The three basic valuation methods used are

 Net Asset Value ( NAV )

7.3 Net Asset Value (NAV)

Figure 6 - Net Asset Value Comparison

(Source: Respective Annual Accounts 2007-08)

7.4 P/E Ratio Valuation

Price – Earnings Ratio for Marico (2007-08)

Profit after Tax (in crores) = Rs 169.1 Crores

Share price as on 31.03.2008 = Rs 67.25

Value of Equity = P/E Ratio * Profit after Tax

Table 4 - P/E Ratio Calculation for Marico

(Source: Annual report 2007-08)

Figure 7 - P/E ratio comparison

(Source: Annual Reports of respective companies 2007-08)

8 Discounted Cash Flow: