How to Read a Balance Sheet: HUL

Let us stay with HUL this time. Is the company’s sales growing? Can we easily relate it to HUL’s balance sheet? If yes, how. If not, what else to look at?

But first, let us recap what we did last time. We saw that HUL has a negative working capital and that the number has ballooned over the years. We saw how creditors are actually a source of finance for the company.

Which leads us to HUL’s sales growth.

HULs Sales Growth

1. Badhti Ka Naam Gaadi. Click on the picture to enlarge it. Look at the red box. By how much has the company’s sales grown over the last decade?

(Clue: Rs 29,000 crores minus Rs 11,000 crores.)

2. Chamatkaar Ho Gaya. Now look at the blue box. Shouldn’t its fixed assets also grow to handle this sales? But has it? How much?

(Clue: More than 18,000 crores? Or less?)

3. Parde Main Rahne Do. If fixed assets haven’t grown as much, is it possible that the HUL’s balance sheet fails to record the money spent? If so, where is it recorded mysteriously? Which specific head and where?

(Clue: Which financial statement shows assets? Which financial statement shows expenses? Which large expense of HUL can actually be considered an asset? Does it matter for calculating important ratios, if we put a large amount as expenses in one financial statement, rather than as assets in the other statement?)

4. Ek Aur Ek Gyaraah. If we take the the fixed assets numbers plus the mystery number, will we still be able to explain HUL’s sales growth?

(Clue: Sales is broken into two parts: prices of units – aka realisations and number of units – aka volumes. Which of them – realisations growth or volumes growth – usually requires money to be pumped in?)

Your Turn

This is the third part of the series on how to read a balance sheet. Now over to you. Tell us what you think.

(Disclosure: I DO hold a position in HUL shares at the time of writing this post. Please also read the terms of use.)

Flickr Creative Commons Image via dynamosquito

11 thoughts on “How to Read a Balance Sheet: HUL”

  1. This is interesting..I have noticed that HUL has employed only Rs 1200 crore additionally in Fixed Assets in the last 10 years…The debt is nil and there is hardly any equity dilution, in fact the company has buyback its shares recently. The average capital employed remains unchanged through out and has gone down slightly in the last 2-3 years.. and still HUL has managed to increase its revenues by Rs 18,000 crore in the last decade..the asset turnover is almost 10 times, with no leverage the third leg of the ROE stool, i.e. operating efficiency must be maintaining the company to churn out phenomenal revenue year-after-year.

    1. About ROE and Dupont analysis, Manish.

      ROE = Operating efficiency * Asset-use efficiency * Financial leverage.

      The role of financial leverage in affecting ROE is well known. HUL of course is debt-free as you point out.

      Asset-use efficiency for HUL is stratospheric (or in other words, capital employed is less) because:

      Negative working capital. Creditors inject steroids in the form of credit. A point we saw in the last part of this series. So other people are putting up their money for the company to sell more. Now that’s the kind a business you want to run! 😛

      Advertisement expense. HUL’s huge spending on advertisements is recorded as an expense in the profit and loss account, instead of as an asset in the balance sheet. Is it logical? Now that’s a million dollar question. What it does, is make HUL’s balance sheet very asset-light.

  2. Thanks for your clarifications…

    Regarding the advertising expense, Prof. Bakshi also mentioned this point in the Relaxo lecture..the huge amount of advertisement cost being incurred by HUL is helping in creating tremendous brand awareness for its products, which coupled with its massive distribution channel result in some form of entry barrier and create a moat. I still won’t say that it helps in creating some form of competitive advantage.

    In fact, Relaxo management makes an interesting point that by reducing the advertising cost they can improve the bottom-line but they wouldn’t prefer that..Thus, they are actually preferring RoE over EPS..

    I tried to check the P&L statement of HUL regarding your point No. 3.I saw some miscellaneous expenses worth around Rs 7000 crore..i think it includes advertising cost..if that’s true then that’s a huge, company is opting for an asset light model and trying to improve sales through massive brand pull..a classic business pyramid strategy. I would still prefer to expense it rather than capitalising it in balance sheet, reason being i need to incur that amount again and again every year, whereas a fixed asset I can amortise over years..moreover, considering the huge cost of TV ads that is set to rise year over years, i won’t think it is prudent to consider it as an asset.

    As far as your 4th point, i think volume growth requires more money to be pumped in..Realization growth indicates some sort of pricing power, which coupled with entry barrier can be an effective moat against competitors..


    This is becoming an interesting learning exercise, I must say.


  3. Taha Merchant

    I would think that whether advertising should be recorded as an expense in the P&L instead of as an asset in the balance sheet is a million dollar question only to the extent of debating whether the benefits arising out of a particular year’s advertising spend extend over more than a year’s time or not.

    But looking at it from the perspective of measuring the general profitability of a company, reaching either conclusion to the above question may not make any difference –

    Scenario 1: You assume that advertising spends have an infinite life in terms of benefits flowing in to the company. In this case, your asset turnover ratios will take a huge hit. At the same time, your annual margins will get a big boost. Haven’t given this a detailed examination, but it seems that the net result to long term average ROEs may be little or nothing viz a viz expensing the entire thing in the same year as incurred.

    Scenario 2: You assume that advertising spends have a finite life of X years (say 5 years). In this case, (again when compared to expensing entirely in the same year) what you would be doing is replacing in the P&L a particular year’s actual advertising expense with an amortization charge which will in effect be the weighted average of the advertising expenses incurred over the last 5 years. Assuming advertising costs go up every year, your margins that year will be higher to that extent because you are acknowledging historical costs instead of current costs in the P&L. On the other hand your asset turnover ratio will be lower to the extent that your assets will now contain the un-amortized portion of advertising spends incurred over the last 5 years. So even in this case it seems that the net result to long term average ROEs may be little or nothing.

    1. Hi Taha,

      Valid points as usual.

      Just to name this debate – we’re talking about expensing vs. capitalisation of advertising charges. It is an issue of accounting policy.

      Over the long-term, It is true that the policy shows time-reversal properties. That is, you can either charge your income statement with advert expenses now (expensing), or gradually over the years (capitalisation, then amoritization).

      In the short-term though, it does matters. Expensing would cause a larger hit to immediate profits, as opposed to amortization.

      You’re right ofcourse, that the effects are caught by either/and: operating efficiency (expensing) and asset-use efficiency (capitalisation). But the relative weights on each and overall impact on ROE, is affected in the short-term by which policy you choice.

      This idea is captured by the phrase:conservative vs aggressive accounting. Stephen Penman points out how it has impact on valuation of shares.

  4. Taha Merchant

    Looking at it from a larger perspective, I think a Dupont kind of analysis does help in understanding to what extent each of the constituents of an ROE are contributing in a particular company’s case. But unless one can say that a contribution from a particular constituent is more sustainable then another, it really makes no difference if a 50% ROE arises from, say unusually large margins, or an unusually large asset turnover, or anything else.

  5. Praveen Kumar

    I have a small question.
    It is clear from above discussion that it is actually advertising that is driving the sales increase.
    With little investments in fixed assets they are able to increase their sales, also as pointed out sales is combination of volume and price.
    So the levers for increased topline are both volume and price, assuming not much increase in price (apart from inflationary increase, sorry i have not checked the actuals), it is the volume that is driving revenue. So this also means they have improve the utilization of their fixed assets/ factory equipment. Finally my question, Is there a metric to measure this – asset utilization from the Financial statements?

    So does this also mean, the utilization was extremely low during the initial years and how long can they sustain increased volumes without investment in fixed assets – how can one measure or get some view on this.

    1. Hey Praveen,

      Good to hear from you man!

      You query assumes that HUL’s topline has increased because of volumes instead of price. Has it? We’ll soon check out the actual numbers to verify this.

      But as you correctly point out, if it was a volumes story, then the key would be asset utilization. And yes, it can be checked from financial statements. Specifically the asset turnover ratio.

      Calculate the ratio of sales (or better cost of sales) found in the income statement to fixed assets found in the balance sheet. Track it over the years. Compare it with peer companies.

      My submission is this. Such an analysis for HUL’s fixed assets is spurious because:

      (1) HUL’s pricing power
      (2) HUL expenses its advertising. Some would ask it to be capitalised, i.e. be called an asset.
      (3) FMCG copanies like HUL are more current-assets centric, rather than fixed-assets centric.
      (4) All of HUL’s current assets – and then some more – is financed by creditors. Hence the negative working capital figure.

  6. Satyajeet Sir,

    Thanks for all the wonderfully motivating articles.

    I got this doubt while reading the Exide annual report, what do they mean when they say ‘A sum of Rs.12 Cr (PY Rs 11.02 Cr) was spent in 2015 on R&D.’? What is PY here?

    Thanks & regards,

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