1.

Introduction
1.1 Background
Corporate finance operates with primary decisions as capital structure,
investment alternatives,and sourcing options. Of these it is one of the vital decisions t
hat the firms decide to use either debt and equities to fund the
operations it affects profitability, financial, and market performance. The
FMCG industry is one of the most vibrant industries in the world
today, with fast inventory turnovers, competitive pricing, and
large operations. Most of the firms in this sector depend on a combination of debt and
equity financing to meet their fast turnaround cycles of
production and extended supply chains.

1.2 Significance of Debt and Equity in FMCG Companies

For FMCG companies, efficient financing strategies are crucial to maintain
operational liquidity and competitiveness in a market driven by consumer preferences.
Debt financing offers tax benefits and leverage for growth, while equity financing
minimizes financial risks but involves ownership dilution.

1.3 Objectives
The objectives of this study are:

To analyse the financial performance of FMCG firms with varying levels of debt and
equity.
To determine the influence of financing decisions on shareholder value.
To present recommendations on the ideal debt-to-equity ratio for the FMCG sector.

1.4 Problem Statement

The biggest issue that FMCG companies face is determining the optimal proportion of
debt and equity, which will enhance their financial
performance with minimum risk. Dependence on too much debt leads to a threat
of solvency while too much reliance on equity dilutes control and results in
reduced profitability.

1.5 Research Questions

How do debt-heavy FMCG firms compare with equity-heavy firms?

What is the relationship between debt-equity ratio and profitability metrics in the
FMCG industry?
What are the determinants of capital structure decisions in FMCG companies?
2. Review Of Literature
2.1 The Determinants of Capital Structure of Indian FMCG Sector

The paper "The Determinants of Capital Structure of Indian FMCG Sector" by

Gagandeep and Dr. Amit Kumar explores factors that determine capital structure
decisions of the FMCG sector in India. The study focuses on 15 leading FMCG
companies listed on the Bombay Stock Exchange, analyzing data from 2017 to 2021.
The research identifies liquidity and profitability as the prime determinants of capital
structure, with higher liquidity and profitability leading to a lower debt-equity ratio.
Other factors such as size, tangibility, business risk, non-debt tax shield, and coverage
ratio were found to be statistically insignificant in determining capital structure.

The paper takes up references from important theories, including the Modigliani and
Miller's Irrelevance Theory, Pecking Order Theory, Trade-Off Theory, and Market
Timing Theory. This small-
sized sample, along with the very short period under study, raises issues;
however, such findings offer rich information for analyzing capital structure
decisions taken by FMCG companies in
India. Results reveal that, even though a few factors universally become significant, in
different situations, in the different contexts and sectors, a variable set can differ.

The findings from this research have shown the significant roles that liquidity and
profitability play in deciding the debt-equity ratio for the FMCG
sector. Therefore, this study finds that these two factors greatly impact capital
structure decisions while the other factors such as size, tangibility, business risk, non-
debt tax shield, and coverage ratio have no effect. This study adds to the
understanding of capital structure determinants in the Indian FMCG
sector, providing a basis for future research and practical applications in financial
management.

2.2 A Study on Equity Analysis on FMCG Sector

The paper "A Study on Equity Analysis on FMCG Sector" by Nishad S and Dr. Syed
Mohammad Ghouse analyzes the financial performance of selected FMCG
companies operating in India from 2015-16 to 2019-20, using secondary data
from an annual report of companies including Hindustan Unilever Limited,
ITC Ltd., Marico Ltd., Dabur, and Britannia Industries
Ltd. The tool applies profitability and liquidity ratios combined with descriptive
statistics and one-way ANOVA in order to analyze the data. Significant differences in
profitability and liquidity of the companies exist and, therefore, ITC
Limited has shown maximum liquidity.

The literature review states many studies conducted to explore the influence of the
movements in the share price, brand equity, and performance of FMCG companies.
For example, Nagarajan and Prabhakaran (2013) have found
a very significant relationship between the share prices of Nestle India Ltd. and the
Nifty Index, while Mohan and Sequeira (2016) explored the influence of brand equity
on operational performance. In this regard, the study references Kumar
(2018), which compared the performance of selected bank and FMCG stocks, and
Patil and Jadhav (2019), which analyzed the growth and financial status of FMCG
companies using various financial ratios.

In the methodology section, fundamental and technical analysis is used in order to

 evaluate the equity of consumer goods companies. The study applies profitability and
liquidity ratios for the financial evaluation of the FMCG companies.
The output shows large ranges of variance in both profitability and
liquidity, signifying that different firms possess some distinctiveness in terms of
their financial behavior. This paper concludes that the company, ITC
Limited, is most liquid out of the one analyzed; hence it's very enlightening to those i
nvestors desirous to make the correct decisions about making investments in the
FMCG sector.

2.3 Determinants of Capital Structure: A Study of Indian FMCG Sector

The paper "Determinants of Capital Structure: A Study of Indian FMCG Sector”, by
Dr. Anil Soni, reviews the theories explaining capital structure choices in Indian
FMCG firms. The research uses data collected from 15 firms in the S&P BSE FMCG
index, for the years covering 2011 to 2016. Using the Debt-Equity Ratio as the
dependent variable, the research evaluates the impact of seven independent variables,
this paper examines profitability, liquidity, size, tangibility, business risk, non-debt tax
shield (NDTS), and the coverage ratio. The established facts disclose the fact that
liquidity and profitability are important factors as increasing liquidity and profitability
reduces the extent of debt-equity ratio. The other variables; size, tangible variables,
business risks, NDTS and coverage ratio were also said to have no relationship with
capital structure choice. The paper makes use of the leading theories such as the
Modigliani and Miller Irrelevance Theory, Pecking order Theory, Trade-off Theory,
and the Market timing Theory. As with every study, there are some limitations: sample
size is relatively small; the study covers only a relatively brief period. However, it
does provide some ideas about the decision-making concerning the funds used in the
FMCG sector functioning in India. The findings of this research provide support to
the hypothesis by asserting that liquidity and profitability have a significant impact on
the debt-equity ratio of FMCG firms therefore supporting the assertion of the study
that liquidity and profitability are important determinants of capital structure
decisions. On the other hand, there is evidence that size, tangibility, business risk,
NDTS, and coverage ratio have at worst a negligible or no relationship with
performance in this context. This paper enhances the knowledge of capital structure
factors within the Indian FMCG industry and serves as a reference for subsequent
research and financial management practice.

2.4
3. Research Methodology

4. Data Analysis
4.1 Britannia Ltd Analysis:
Trend Analysis of Britannia Ltd.:

Observations from the Graph:

Low Debt-to-Equity Ratio (2015-2019):
The ratio is close to zero (less than 0.01) for FY 2015 to FY
2019. This indicates a prudent capital structure with minimal dependency on
debt. The company has most probably financed its operations and growth through internal
accruals and equity rather than raising debt.
Sharp Spike (2020):
In FY 2020, the ratio shoots up sharply to 0.282, which is a turning point. This reflects a
strategic shift toward higher debt usage, possibly to finance capital expenditures
or to meet operational challenges. This is in line with the spurt in both long-term and short-
term borrowings observed in the data.
Sustained Growth (2021-2023):
The ratio continues to grow, reaching 0.543 in FY 2021 and peaking at 0.807 in FY 2023.
Aggressive leveraging in these years, probably to manage liquidity or fund
growth during market disruptions (e.g., the COVID-19 pandemic).
Risk of over-leverage: the ratio is approaching 1.0, which indicates heavy dependence on
debt compared to equity.
Decline in FY 2024:
The ratio declines to 0.537 in FY 2024, indicating attempts to reduce debt obligations or
growth in equity reserves. This reflects a more balanced approach to managing financial risk.
Key Takeaways:
Conservative Start: The company kept debt low until FY 2019, which is in-line with its
historically stable and profitable business model.
Debt Spiked in FY 2020: The sharp spike in FY 2020 also aligns with the pandemic as well
as increased operational and strategic funding needs.
High Leverage Risk: The increase in leverage from FY 2021 to FY 2023 may pose financial
risk, mainly during economic slowdowns or rising interest rates.
Deleverage Success in FY 2024:
The downward trend in FY
2024 reflects the achievement of deleveraging and being more conservative in managing the
capital structure.

Suggestions
Debt Pay-Down
Maintain the current trend of debt pay-down by keeping the Debt-to-Equity Ratio at the
lowest possible level, below 0.5, to minimize financial risk.
Focus on Equity Growth:
Keep more of your earnings or consider equity sources to improve the level of reserves
and decrease dependence on debt.
Track Interest Costs:
Reassess the cost of debt to ensure it doesn't eat away at profitability.

4.2 ITC Analysis

As presented in the table above, here is a thorough breakdown of the company's

financial ratio in terms of debt and equity from 2015 to 2024:

1. Total Liabilities:
The total liabilities have increased substantially from ₹447,171.9 million in 2015 to
₹880,239.8 million in 2024. It shows that there is a growing dependence on debt in the last
ten years.

2. Tangible Net Worth:

Tangible net worth has also displayed a steady increase from ₹302,819.3 million in 2015 to
₹664,469.8 million in 2024. This increase is indicating that the company had improved its
equity base with time.

3. Total Outside Liabilities:

Total outside liabilities have increased from ₹139,815 million in 2015 to ₹157,906.8 million
in 2024, meaning there is an increase in liabilities of the company other than core ones.
4. Reserves and Funds:
Reserves and funds have grown from ₹299,341.4 million in 2015 to ₹709,848.3 million in
2024, indicating a strong accumulation of retained earnings and other reserves.

5. Long Term Borrowings:

Long term borrowings have fluctuated but generally increased from ₹386.9 million in 2015
to ₹2,637.1 million in 2024. This suggests a strategic use of long-term debt to finance
growth.

6. Short Term Borrowings:

Short term borrowings have changed considerably, with a considerable increase from ₹36
million in 2016 to ₹467.4 million in 2024. This reflects that short-term debt is used for
operational purposes.

7.Equity Capital:
Equity capital has increased from ₹8,015.5 million in 2015 to ₹12,484.7 million in
2024, which reflects steady equity inflow over the years.

8.Debt to Equity Ratio:

The debt-to-equity ratio has decreased over the period from 0.46 in 2015 to 0.24 in
2024, thereby implying a better leverage position over the
period. The smaller ratio indicates that the company depends less on debt in proportion to its
equity.

This generally means that the company was always balanced in managing its debt and
equity, both being heavily increased over time. As a result, a negative trend of the decreasing
debt to equity ratio may further improve financial stability, therefore reducing leverage.
Key Takeaways:

1. Initial Drop (2015-2016): The Debt-to-Equity Ratio drastically dropped from 0.46 in 2015
to 0.22 in 2016. This means a huge debt-to-equity ratio was reduced, and it might mean
that the company has paid off some significant portion of its debt or increased its equity base.

2. Stability (2017-2024): After the initial decline, the Debt-to-Equity Ratio was relatively
stable with minor fluctuations. This stability shows that the company has maintained a
balanced approach in managing its debt and equity over the years.

3. Consistent Ratios (2022-2024): The ratio was constant at 0.24 from 2022 to
2024, which indicates that the company has reached a sustainable level of debt relative to its
equity.
Overall, the company has proven to have a strong management of financial leverage as its
reliance on debt has decreased and Debt-to-Equity Ratio has been maintained stable over the
years. It is a sign of good financial health and prudent management of capital structure.

4.3 HUL Analysis

1. Debt Analysis:
Long-Term Borrowings:
Remained consistently at 0 throughout the period, indicating no reliance on long-term debt.

Short-Term Borrowings:
Temporary usage was observed in 2017 (₹2240 million) and 2018 (₹2640 million). This
could represent short-term financing needs that were promptly repaid.

Total Debt:
Reflects a debt-free strategy in most years, with slight exceptions in 2017 and 2018.

Debt-to-Equity Ratio:
Remained near zero, highlighting HUL's minimal dependence on leverage for growth or
operations.

2. Equity Analysis:

Equity Capital:
Relatively stable at ₹2160-₹2163 million for all years, without any new equity
shares issuance.

Reserves:
Increased gradually from ₹35,084 million in 2015 to ₹74,430 million in
2019, depicting strong profitability and retention of earnings.

Tangible Net Worth:

Increased nearly two-fold during the period from ₹37,020.8 million in 2015 to ₹72,220
million in 2019, thus depicting a strengthening of the equity position.

Important Takeaways:
Conservative Capital Structure: HUL uses equity to
finance its business and expansion rather than debt, thus reducing financial risk.
Reserves Growth: The growth in reserves is a reflection of the
efficient retention of profits that provides financial security and operational flexibility.

Short-term Borrowing: The short-term borrowings in 2017 and 2018 may have been
strategic to address short-term liquidity needs.

The capital structure of HUL is prudent and low-risk, emphasizing equity over debt.

HUL Debt-to-Equity Ratio Trend Lines from 2015 to 2019

1. Minimal Use of Debt

The firm conducted most of its business during this
period with minimal or zero debt, as can be inferred from the near zero Debt-to-Equity
Ratio in most years

2.Small Increase in 2017-2018

The ratio experienced a small increase in 2017 and 2018. This was a short-term spike in
short-term borrowings, which were repaid entirely by 2019

3. Strong Equity Base

HUL relies heavily on equity (share capital and reserves) rather than external
borrowings, which indicates a conservative financial strategy focused on maintaining
financial stability.

4.4 AMUL analysis

1. Debt Analysis:
Long-Term Borrowings:
Surged up manifold from ₹ 139.8 million in 1989 to ₹ 5300.6 million in
2019. It reflects that long-term debts have been increasingly used as sources of funding for
expansion.

Short-Term Borrowings:
Continuously increased from ₹ 1128.2 million in 2013 to ₹ 2834.2 million in
2019. Such growth shows the need of the company for working capital or short-term
financing.

Total Outside Liabilities:

Registers the upward growth trend, stood in 2019 at ₹21212.6
million with more responsibilities associated with both operational and financial-
related activities.

Debt-to-Equity Ratio:
Reached peak 11.69 during the year 2015, when more leverage existed.
Holds slight decline after the
years 2015 and registers to 8.92 at 2019, a moderate approach for managing debts that have
arisen in later periods.

2. Equity Analysis
Equity Capital:
Increased manifold times from ₹20.5 million in 1989 to ₹882.3 million in
2019, indicating steady growth in shareholder investment

Reserves and Funds: Increased manifold times from ₹507.6 million in 1989 to ₹21212.6
million in 2019, depicting vigorous profitability and reinvestment back into the business

Tangible Net Worth : Increased steadily, ₹160.3 million in 1989 to ₹2376.8 million in
2019, thus evidencing the strengthening equity base over time.
Key Insights:
1. Rising Debt Levels:
Amul has been increasingly using both long-term and short-term debt to finance its
operations and expansion.
This is a sign of growth and expansion, but the high debt-to-equity ratio, especially in
2015, indicates potential financial risk.

2. Equity Growth:
The steady increase in equity capital and reserves reflects a strong financial foundation,
enabling the company to balance debt usage.

3. Balanced Approach Post-2015:

After 2015, the debt-to-equity ratio is falling, indicating a shift toward more sustainable
leverage levels.
Overall, Amul has used a mix of equity and debt, with a stronger reliance on debt for growth,
but it seems to be managing its leverage in a more conservative manner during the recent
years.
4.5 Dabur Ltd.

Trend analysis
5. Conclusion
6. References