Financial Diagnostic Report of Farm Fresh

Question: Discuss about the Financial Diagnostic Report of Farm Fresh. Answer: Introduction Business expansion is necessary for increasing the net income of the business and capturing the global market. It also promotes the brand of the company. However, the decisions of the business expansion are crucial because of the amount of investment that is required for expansion and compliance of the various statutory regulations. Therefore, it is important to assess the viability of the business in the region where the expansion is proposed. This report studies the viability of business expansion of Farmfresh in three different Asian regions India, China and Singapore. The growth of the industry and the performance of the competitors have been analyzed to assess the viability of the business expansion in these countries. The various regulatory requirements by the statutory bodies of the countries have been also studied to understand the rules and regulations that have to fulfill by the company in the course of operations. The prospects of mergers and acquisition with the competitors for capturing the markets have also been analyzed to assess if the business expansion should be targeted through mergers and acquisitions. Regulatory Framework Barriers to Entry and Competition Policy Issues In markets, fair competition is very crucial for social as well as economic development and eradication of poverty. But anti-competitive methods as well as practices have decreased the growth as well as innovation opportunities. In India, an appropriate strategy for entry has to be considered by every investor. He can either set up a company, liaison or branch in India. It depends on the nature of operations or type of business etc. Foreign Direct Investment (FDI) policy regulates the Foreign Investments in India which is issued yearly by the concerned department of the Indian government. Taxation also plays a key role in determining the entry barriers. Both implications of direct as well as indirect taxation have to be considered. Lastly, exit strategy must also be planned initially, as the barriers and the cost to exit shall determine the entry strategy. Competition issues are handled by the Competition Commission of India. In China, competition policies are regulated by Anti-Unfair Competition Law, Price Law as well as Anti-Monopoly Law. Shandong is the agricultural hub for agricultural products sold in China. The location has to be chosen; government policies have to be strictly adhered and appropriate staff has to be hired with due diligence. On the rank of liberty, Singapore maintains one of the top liberal trading positions in the world. Singapore imports around 90% of its eatables from the whole world. Since the innovators of Singapore food technology might not be having the capacity to fulfil such a big market, this is achieved by entering into partnerships with companies all over the globe including Australia as well as New Zealand to meet such high requirement for healthy good quality food products. Consideration of Mergers Acquisitions for the prospective Target Companies In India the target companies selected are a private company as well as a public company. For the public companies to prevent malpractices and to ensure that the merger or acquisition is for operational efficiency, The Competition Act 2002 has undergone a change that has replaced the voluntary notification regime with mandatory regime. These regimes are concerned with the business uncertainties. If the companies are involved in anti-competitive practices as a result of the business combination, it will lead the way to demerger for the companies. The Indian competition law grants a period of 210 for the determination of the business combinations (Bansal, 2010). Unlike the public company, the shares of the private company would be held by numbered individuals but the mergers in this case are relatively more difficult as it would result in the dilution of the ownership where it lies in concentrated hands. China and Australia have recently signed the China Australia Free Trade Agreement (ChAFTA). It has opened up the potential for the Australian firms to do business in China. However, it is important that the laws for mergers and acquisitions that are prevailing in both the companies are understood to prevent the risk of non-compliance (Edghill, Sylow and Zhou, 2015). The Chinas Antimonopoly Law (AML) requires that mergers and acquisitions that cross a certain threshold limit have to be notified to the Ministry of Commerce. There have been lesser instances of merger and acquisition of Australian companies with the Chinese companies in the past years as the Australian companies have not been able to earn high revenue in China, but the agreement is expected to increase the business between these two companies. It takes almost 50 days to register a notification while in some cases the period may extend to one year (Edghill, Sylow and Zhou, 2015). The AML has recently become very active to prohibit the dominant companies from abusing their position. Therefore, in the case of overpricing by the Australian companies they might face the investigation by the authority. Therefore, for considering acquisitions and mergers in China by the Australian Companies it is important that the companies are aware of the AML rules and the consequences of breaching them. The laws and regulations impacting the companies that are carrying on business in Singapore are present in the Companies Act and Securities and Futures Act. Both the private and the public companies have to abide by them. The listed securities also have to comply with the requirements of the Singapore Securities Exchange Trading Ltd. The Chapter 50B of the Competition Act, in addition to the other things also prohibits:- Agreements that are entered into by the companies for restriction or prevention of the competition, The conducts that would result in abuse of the dominant position, The mergers that may have the impact of lessening competition in any industry Singapore. Firm-specific comparative financial statement analysis and vertical analysis The financial statements of Kissan which is a subsidiary of Hindustan Unilever Ltd have been analyzed. It is a division of Hindustan Unilever Ltd which is involved in the manufacturing of jams and jellies. It is a leading brand in the country and the products of Kissan are widely used in the household. The company has few competitors and major ones include Heinz and other local products. If the packaged foods section of the HUL studied we can observe that there has been an increase in the turnover of the company in the past few years. The profit has also witnessed a tremendous increase in the past few years. Mapro Food Products is involved in the manufacturing of concentrated beverages, jams and jellies. It is a food processing company. It is privately held and is financed by equity. The net profit of the company has increased in the past years owing to its growing business. The company operates in India. The Chinese company Jining Hongwannian Trading Commercial is a subsidiary of Jinxiang Huaguang Group. The company was established in the year 2014 and most fresh fruits and vegetables. The export sale accounts for 50% of the revenue of the company. The group has held the first post for five consecutive years in the industry. The company supplies the products in America and few regions of Europe. The client base of the company consists of both domestic and global customers. The other competitor Shandong Chengwu Jinshanluan Garlic Industry Co., Ltd was established in the year 2007. It deals in garlic, garlic powder, other garlic variants and other fruits and vegetables. The company export sale amounts to 90% of the total revenue which implies that the company is majorly engaged in export business but also supplies to the domestic market in minor quantities. It mostly supplies its products to Africa, Asia and Australia. Cold Storage is a brand that is held by Dairy Farm International Holdings Limited. The company is a multi-national company and operates in China, Singapore and Taiwan as well. The company has Asian base of customers. The firm operates at lower margins for Cold Storage. The company holds 100% interest in the Singapore division (Appendix 1). The company witnessed a decline in the sale in the previous year due to intense competition and low category growth. The net margins were affected by the increased labor and rental costs. The promotional intensity and price competition also affected the margin and impacted the net income of the group. Therefore, to address a weak economic outlook the company is optimizing its products with improved items and brand promotion. Fairprice Supermarket chain has been operating in Singapore for a period exceeding forty years. The objective of the company is to moderate the cost of living of the people of the country. The company operates in Singapore only. The revenue of the company witnessed an increase; however the profit of the company has declined in the past year due to slow growth in the industry (Appendix 3). The profit from the retail business has drastically decreased that has been compensated by other businesses. The company has been financed mostly by equity and has only the statutory amounts as long-term debts (Appendix 2). The major portion of the liabilities of the company comprises of the current liabilities that arise in the course of the working. The company has witnessed a decline in the profits both as a group and cooperative in the year 2015. Country Name Company 1 Company 2 India Mapro Foods Pvt Ltd Kissan Foods by Hindustan Unilever Ltd China Jining Hongwannian Commercial Trading Co.,Ltd Shandong Chengwu Jinshanluan Garlic Industry Co.,Ltd Singapore Cold Storage owned by Dairy Farm NTUC Fairprice supermarket chains Recommendation After the analysis of the company profile and the state of affairs of the competitors, the investment by Farm Fresh through Foreign Direct Investment can be considered as more feasible. The rationale behind the same is that almost all competitors are a division of the group companies that have large customer basis and have a strong financial position. The investment required for expansion and the market penetration is easily possible for them because of their global recognition, therefore merger and acquisition are not possible with these companies. The key players of China are mostly engaged in the export of the products and are not majorly operating in domestic sale so; the objective of capturing the market would not be met by mergers and acquisitions. Singapore is experiencing a slow growth in the fruit sector, and the companies are the pioneers in their industry. They already have their share in the market, and therefore, it cannot be captured with Merger and Acquisition with the se companies. The Free Trade Agreement has been recently signed between Australia and China, and its impacts are yet to be determined in future. Therefore, investment in Chinese market seems not viable from a financial and regulatory perspective. The Singapore markets are already facing downfall in the fruits and vegetable industry. The income and revenue have been impacted drastically for the key players therefore; penetrating the Singaporean market in an adverse situation is not feasible currently. The company can consider investing in India through Foreign Direct Investment. Foreign Direct Investment in India The country allows 100% FDI under automatic route in fruits and vegetable industry therefore; the investment can be made after analyzing the potential regions for investment. Five years tax holiday has also been provided by the government for new food processing units. The regulations of the capital market are formulated by the Securities and Exchange Board of India. If the company wants to invest in the country with IPO, it has to file a prospectus and minimum subscription is required to be achieved for obtaining the certificate of incorporation. The company can also seek the assistance for the underwriting services. Conclusion The analysis of the facts and the prevalent situations in different countries imply that investment in Indian market is expected to generate higher returns for Farm Fresh. Mergers and acquisitions do not seem as feasible option currently therefore, it must consider flourishing its own entity for conducting business. The company can invest in India to penetrate its untapped market and expand its business. The company might have to incur additional advertisement expense for brand promotion but investment in India and expansion of business is expected to be viable for the company in the long run. References Bansal, A. (2010).Mergers Acquisitions: Some Key Issues. [online] Indianmba.com. Available at: https://www.indianmba.com/Faculty_Column/FC1173/fc1173.html [Accessed 19 Dec. 2016]. Dairy Farm, (2016).Annual Report 2015- Dairy Farm Holdings International Ltd. 1st ed. pp.32, 108. Edghill, K., Sylow, C. and Zhou, Z. 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