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Cost Structure Analysis of Hindustan Unilever Limited
The document analyzes the cost structure of Hindustan Unilever Limited (HUL) over several years. It finds that HUL's cost structure consists of 18% fixed costs and 82% variable costs. Advertising is the largest fixed cost at 14% of total costs. Raw materials are the largest variable cost at 34% of total costs. Compared to peer Procter & Gamble, HUL spends more on advertising and less on royalties and outsourced professional jobs. The document also performs a breakeven analysis and contribution volume profit (CVP) analysis for HUL.
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Cost Structure Analysis of Hindustan Unilever Limited
- 1. Analysis of CostStructure of Hindustan Unilever Limited Presented by: (Group 13) Anjali Sinha Abhinav Ashesh Shivesh Satyam Sunny Agarwal
- 2. Background of theCompany Hindustan Unilever Limited (HUL) is the largest FMCG company in India. It is owned by the British-Dutch company “Unilever” and has about 67% majority stake in Hindustan Unilever Limited . Its products include foods, beverages, cleaning agents and personal care products. It is headquartered in Mumbai, Maharashtra, India. Hindustan Unilever Limited has over 35 brands spanning 20 distinct categories. As per Nielsen market research data, two out of three Indians use HUL products.
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- 4. Cost Structure ofHUL Royalties, technical know-how fees, etc 7,354.70 3% Rent & lease rent 1,965.10 1% Outsourced professional jobs 41.6 0.01% Non-executive directors' fees 13.8 0.005% Advertising expenses 38,749.40 14% Insurance premium paid 51.8 0.02% Depreciation 2,859.10 1% R & D expenses (capital & current account) 321.4 0.12% Total Fixed Costs 51,356.90 18% Total Cost 2,78,159 Fixed cost as a % of Total Cost 18% Variable cost as a % of Total Cost 82%
- 5. Cost Structure over5 Years
- 6. Cost Structure over5 Years Fixed Costs 2009-10 2010-11 2011-12 2012-13 2013-14 2014- 15 R & D expenses -0.2 -11.5 62.3 -30.2 -19.1 -64.7 Royalties, technical know-how fees, etc 70.4 9.1 28.2 39.7 40 Rent & lease rent 18.3 -1.5 -4.1 8.2 -4.7 6.8 Insurance premium paid 9.2 8.4 20.9 16.2 -12.3 -9.6 Outsourced professional jobs 23.1 0.2 2.8 1.4 -19.3 -13.7 Non-executive directors' fees 139.6 8.7 Advertising expenses 40.3 15.6 -4.7 22.7 11.8 7.2 Depreciation 17.8 20 -1.2 7.8 10.3 10.2
- 7. Comparison with peers ParticularsHUL P&G Raw materials, stores & spares 34% 30% Purchase of finished goods 13% 18% Packaging and packing expenses 9% 1% Power, fuel & water charges 1.10% 1% Compensation to employees 6% 7% Indirect taxes 8% 1% Repairs & maintenance 0% 1% Outsourced manufacturing jobs 1% 4% Distribution expenses 5% 9% Travel expenses 1% 1% Miscellaneous expenditure 3% 2% Total Variable Cost 82% 80%
- 8. Particulars HUL P&G Royalties,technical know-how fees, etc 14% 29% Rent & lease rent 4% 1.57% Outsourced professional jobs 0.1% 7.25% Non-executive directors' fees 0.03% 0.10% Advertising expenses 75% 49% Insurance premium paid 0.1% 0.10% Depreciation 6% 14% R & D expenses (capital & current account) 1% 0.01%
- 9. ₹ 297,172.80 ₹ 41,095.50 ₹49,174.10 ₹ 56,829.70 ₹ 43,849.20 ₹ 37,336.80 Total Expenses (in Mn.) Hindustan Unilever Ltd. Godrej Consumer Products Ltd. Dabur India Ltd. Procter & Gamble Home Products Pvt. Ltd. Marico Ltd. Colgate-Palmolive (India) Ltd.
- 10. Managerial Accounting andDecisions • A strong supply chain saving programme, driven by various cross functional teams such as R&D, Procurement, Manufacturing and Logistics, has delivered significant savings • Aquagel Chemicals Private Limited, was amalgamated
- 11. Evaluation of Managerial performancethrough EVA • EVA = Net Operating Profit after Taxes (NOPAT) - Cost of Capital Employed (COCE). • EVA will increase if: I. Operating profits can be made to grow without employing more capital, II. Additional capital’s invested in projects that return more than the cost of obtaining new capital, I.e. profitable growth.
- 12. Economic Value Added(EVA) Trend 0 500 1000 1500 2000 2500 3000 3500 4000 2005 2006 2007 2008-09 (15 months) 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Series1
- 13. Control Practices • Ruraland Modern Trade channels continued as a key focus area. • Company has changed the servicing model from a physical servicing model to an online ordering and fulfilment model. • Used almost 60,000 tonnes of renewable biomass as fuel, saving corresponding amount of fossil fuels.
- 14. Cont... • ‘World ClassManufacturing’ that aims to eliminate non-value added activities leading to further improvement in efficiencies and cost. • The ‘Procure to Pay’ project ensured sustained world class levels of payment efficiency and purchase order compliance. • P2P is a technique of using projected manufacturing production schedule to figure out what supplies material is needed
- 15. • Rank amongthe Top 3 companies in manufacturing sector for Best Presented Accounts by the Institute of Chartered Accountants of India, for the second consecutive year.
- 16. CVP Analysis Particulars FormulaCalculation Result Break Even Sales(in Rs. Millions) Fixed cost/(P/V ratio) 51356.9/0.3064 Rs.167627 P/V ratio (Contribution / Sales )*100 100178.80/326980 0.3064 Margin of safety Actual Sales - BEP(Rs) 326980-167627 1,59,353 Margin of Safety Ratio (Margin of Safety /Actual Sales)*100 1,59,353/326980)*100 48.73 Sales 326980 Fixed Cost 51356.9 Variable Cost 226802.1 Contribution 100178 P/V Ratio 0.3064 Working Notes:
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- 18. Analysis • Margin ofsafety is an advantage to the company. MOS is 48..73% which is high. This means that the firm will earn profits even if there is a slight fall in production or sales. • BEP sales is Rs.167627 millions which is extremely low in comparison to current sales (Rs. 326980 millions). • BEP analysis will help the banker in appraisal of actual/projected performance of the borrower. It also acts a sensitivity analysis tool to judge the projected performance.
- 19. Suppose the companyexpects a profit of 60000 millions for the next financial year Desired Profit 60000 P/V Ratio 0.3064 Fixed Cost 51356 Desired sales 363468.9 For the company to reach a profit value of 60000 millions it has to impove its sales by Rs. 36,488 millions.
- 20. Should HUL spend₹12,000 Millions on digital advertising to increase sales by 10 percent? Sales 326980 359679 Less: Variable Cost 226802 249482.3 Contribution 100178.80 110196.7 Less: Fixed Costs 51356 63356.9 Profit 48,821.90 46,839.78 Profit is decreased even more So Hindustan Unilever Limited should not have to spend on digital advertising