Jul 23, 2006
Industry Report of the FMCG sector profiling P&G,UL,KMN,
Financial Statement Analysis
In the healthy and growth inducing economic scenario of the 2000’s, P&G has seen double digit revenues growth to around $56b in 2005. Keeping its costs low has seen it achieve healthy profit margins of around 11% - 12%. Refer Table 1. Table 1
(in %) 200320042005
Gross Margin 4951.251
Profit Margin 11.9612.6112.79
Financial Health: P&G is a stable company operating in a very mature and stable steady growth industry. It has an average Return on Assets of 12.5% and a high average Return on Equity of 43%. It turns its Inventory around 12 times a year, which is also an industry average . One weak aspect of P&G is its relatively poor liquidity position. One reason is the high STD (short term debt). P&G, being a low risk firm is able to get STD at low interest rates and hence uses this instead of LTD. It generates huge positive free cash flows to ensure prompt payment of interest. I feel P&G prefers STD due to its speed and flexibility (no covenants). Another reason for the low liquidity is its almost equal balance between its A/R and A/P. While a firm of its size should be able to work on its supplier’s capital, P&G surprisingly has not been able to that. Unilever has the highest A/P deferral period in the industry, thus leveraging its size to get a better bargain from the suppliers. P&G however, has an industry average A/P deferral period. The only reason I see P&G doing that it believes in treating suppliers better than its competitors by paying them on time as promised. This is part of P&G’s best practices philosophy and also of treating suppliers as partners. Therefore this weak position is not an indication of poor financial management, rather a reflection of good relations with suppliers. P&G finds itself in a commoditized market, with most of its products required for daily use. Growth in this industry depends on demographic factors such as population growth and advertising and marketing strategies more than anything else. Hence it can have leverage itself by issuing long term debt which currently is 14% of its total capitalization.
Efficiency Ratios: P&G has an average CCC of around 40 days . A firm like P&G should ideally have a negative CCC. Its closest competitors like Unilever and JNJ have managed CCC of (57) and 12 days respectively. It has to adopt stricter policies with its suppliers and reduce its Inventory conversion period. However, given the stable nature of the industry these will be difficult tasks. It will be difficult to change methods adopted by old suppliers.
Sustainable Growth: P&G is experiencing average revenue growth of 12% and average sustainable growth rates of 28%. This suggests that P&G can grow at this rate without borrowing any additional funds.
Dividend Policy: Given the stable industry that it finds itself in, P&G’s capital expenditures as compared to firms in high growth sectors like Technology are low. In fact CAPEX as a % of sales is less than 4%. Therefore, P&G can have a high payout ratio, because its need for funds is low. The average industry payout ratio is 40%. Thus we would expect most firms in the industry to pay regular dividends. In fact, P&G has not only been paying regular dividends since its inception, since the last 50 years it has been paying regularly increasing dividends.
P&G faces direct competition in all its product segments from worldwide leaders like Unilever, Kimberly Clark and Colgate – Palmolive.
Unilever N.V: Unilever N.V is a parent company of Unilever Group. It is divided into the Foods and Home & Personal Care division. It competes with P&G with brands like Dove, Lux, Omo and Surf. It had sales of around $50Billion and has 223,000 employees worldwide....