Remain Invested In Hul For Steadfast Gains!

Kiran Dhavale

HUL and GlaxoSmithKline Consumer Healthcare Limited (GSK CH India) entered into a scheme of amalgamation whereby 4.39 shares of HUL will be allotted for every share in GSK CH India. 

HUL signed an agreement with Vijaykant Dairy and Food Products Limited (VDFPL) and its group company to acquire its Ice Cream and Frozen Desserts business which includes VDFPL’s flagship brand ‘Adityaa Milk’ and front end distribution network across geographies. 

Hindustan Unilever Limited (HUL) is a prominent FMCG company with a product portfolio of over 40 brands spanning 20 categories like soaps, skincare, cosmetics, packaged foods and more. The noteworthy brands include Lux, Lifebuoy, Fair & Lovely, Pond’s, Vaseline, Rin, Surf Excel, Wheel, Dove, Clinic Plus, Sunsilk, Knorr, Kissan, Pepsodent and Closeup, to name a few. HUL’s product offerings span across seven million outlets in India. 

Industry Overview

The FMCG companies faced several headwinds over the last three years and more so during FY17-18 on account of GST implementation and demonetisation. The uncertainty in the market resulted in a cautious trade sentiment. This dampened the operating environment of HUL during the period. However, the rising incomes, favourable demographics, improved lifestyles and a better understanding of technology have bolstered the prospects of the FMCG sector. The consumer preferences are changing dramatically as they are favouring authentic brands with a purpose over materialism. Influencers are playing a major role in shaping these preferences. 

Financial Performance 

Based on the YoY quarterly financials, the revenue from operations increased to Rs 9,234 crore in Q2FY19 from Rs 8,309 crore in Q2FY18, posting a growth of 11.13 per cent. EBITDA rose to Rs 2,019 crore in Q2FY19 from Rs 1,682 crore in Q2FY18, registering a growth of 20.03 per cent. Consequently, net profit rose to Rs 1,525 crore in Q2FY19 from Rs 1,276 crore in Q2FY18, marking a climb of 19.51 per cent. EPS increased to Rs 7.04 in Q2FY19 from Rs 5.90 in Q2FY18, thereby rising 19.32 per cent. The net profit margin improved to 16.52 per cent in Q2FY19 from 15.36 per cent in Q2FY18. 

On the QoQ quarterly front, the revenue from operations stood at Rs 9,234 crore in Q2FY19 versus Rs 9,487 crore in Q1FY19, posting a drop of 2.66 per cent. EBITDA fell to Rs 2,019 crore in Q2FY19 from Rs 2,251 crore in Q1FY19, thereby decreasing 10.30 per cent. Subsequently, net profit dipped to Rs 1,525 crore in Q2FY19 from Rs 1,529 crore in Q1FY19, posting a drop of 0.26 per cent. EPS declined to Rs 7.04 in Q2FY19 from Rs 7.06 in Q1FY19, posting a marginal fall of 0.28 per cent. Net profit margin stood at 16.52 per cent in Q2FY19 as against 16.12 per cent in Q1FY19. 

On the annual front, revenue from operations rose to Rs 36,238 crore in FY18 from Rs 35,759 crore in FY17, thereby rising 1.33 per cent. EBITDA increased to Rs 7,499 crore in FY18 from Rs 6,340 crore in FY17, posting a growth of 18.28 per cent. Net profit stood at Rs 5,227 crore in FY18 in comparison to Rs 4,490 crore in FY17, registering an increase of 16.41 per cent. Meanwhile, basic EPS rose to Rs 24.08 in FY18 from Rs 20.74 in FY17, thereby surging 16.10 per cent. Net cash generated from operating activities stood at Rs 6,064 crore in FY18 as against Rs 5,185 crore in FY17, posting a growth of 16.95 per cent. During FY17-18, HUL’s domestic consumer business rose 12 per cent owing to an underlying volume growth of 6 per cent. Meanwhile, EBITDA margin increased by 155 bps and ensured a consistent track record of cash generation. The board has proposed a final dividend of Rs 12 per share, subject to shareholders' approval. This, in conjunction with an interim dividend of Rs 8 per share, brings the total dividend to Rs 20 per share. 

Segment-wise Performance 

The competitive position of the home care segment improved on the back of accelerated growth momentum. Surf Excel remained the best performing product as it continued to deliver volume growth and premiumisation. The Rin detergent bar underwent an upgrade using a patented ‘smart-foam’ technology. The personal care, hair care, ice creams and frozen desserts segments witnessed positive growth. Meanwhile, the innovation and investments in household care and fabric conditioners produced admirable outcomes. The naturals segment fared well, particularly due to Indulekha Hair Oil’s excellent performance and new product launches such as ‘Lever Ayush’. The foods segment flourished on the back of HUL’s robust brand and market building initiatives. Under the refreshments segment, HUL reclaimed market leadership in tea, while BRU coffee continued its premiumisation initiatives. Overall, the segmental revenue break-up stands as follows - personal care and home care contributed to 47 per cent and 33 per cent, respectively, while refreshments, foods and others contributed to 15 per cent, 3 per cent and 2 per cent, respectively. 

Mergers & Acquisitions 

On August 6, 2018, HUL signed an agreement with Vijaykant Dairy and Food Products Limited (VDFPL) and its group company to acquire its ice cream and frozen desserts business. The deal included VDFPL’s flagship brand ‘Adityaa Milk’ and front-end distribution network across geographies. On December 3, 2018, the board of directors of HUL gave the green signal for a scheme of amalgamation between HUL and GlaxoSmithKline Consumer 

Healthcare Limited (GSK CH India), subject to the approval of the shareholders and the concerned authorities. The transaction involves an all-equity merger, whereby 4.39 shares of HUL will be allotted for every share in GSK CH India. This will dilute Unilever’s holding in HUL to 61.9 per cent from 67.2 per cent and escalate the value of the business to an impressive Rs 317 billion. The acquisition is harmonious with the company’s objectives of building a sustainable food and refreshment (F&R) business by capitalising on the health and wellness trend prevalent in India. GSK CH India is a prominent market leader in this category with exemplary brands like Horlicks and Boost. Its business delivered total turnover of nearly Rs 42 billion as of March 2018. Despite delivering a double digit average growth rate, the F&R category remains under-penetrated. HUL is well-placed to remedy this on the back of its extensive coverage and tech-driven capabilities. Thus, the merger is certain to augment shareholder value by means of revenue growth and cost synergies. The management commentary suggests customer development to be an indisputable growth multiplier and has forecasted the F&R business to cross Rs 100 billion. HUL’s strategy provides special focus on rural areas, emerging channels and increased product offerings. The company is focusing on deriving benefits via supply chainefficiencies and operational improvements.

Growth Drivers 

HUL’s business performance is being driven by a transformational programme called Connected 4 Growth (C4G) which facilitates swifter decision-making, innovation and increased speed to market. The company established a Unilever Sustainable Living Plan (USLP), which has augmented the success of HUL’s sustainable living brands. USLP is a value-driver as it promotes costefficiency, ensures sustainable flow of raw materials and engenders trust in the minds of stakeholders and regulators. The rural demand has surpassed urban demand; therefore, the company has ample opportunities to expand its market to the rural regions. The key thrusts for HUL remain on strengthening the core portfolio, building purpose driven brands, creating categories for future, premiumisation and market development.

Core Competencies 

HUL has to its credit a remarkable sales and distribution system with an unparalleled nation-wide presence across traditional and modern trade channels. It is widening its reach, while leveraging technology and intelligent analytics to boost customer service and on-shelf availability. It continues to invest substantially in building capabilities, particularly in the e-commerce channel. Owing to a topnotch supply chain, HUL’s customer service levels crossed 95 per cent and resulted in record high savings in costs and cash, which in turn led to healthy margin improvement. The enormous product portfolio comprising of brands with a strong presence has created ample headroom for growth. HUL is developing capacities towards mass customisation and precision marketing. 

Challenges 

HUL had to cut down on advertising expenditure while transferring input cost inflation to the customers. The cost of raw materials like oil as a proportion to revenue increased. However, the proportion of ad-expenses and other spends vis-à-vis revenues declined in comparison to the levels witnessed in the previous year. The deterioration of the Indian rupee posed some hurdles as well. Moreover, HUL is facing stiff competition from peers like Britannia and Nestle. In certain segments like detergents, HUL’s market share has fallen on account of competition from Ghadi and Nirma detergents. While having a plethora of brands provides diversification benefits, it does result in some confusion pertaining to price positioning. HUL has managed to partially offset the headwinds coming through in crude and currency with benign vegetable oil and food prices. In Q2FY19, HUL faced disruptions in the form of a transport strike and the floods in Kerala.

Conclusion and Recommendation 

HUL delivered double digit volume growth in Q2FY19 for the fourth consecutive quarter. The company has demonstrated a consistent track record of sustainable and competent growth. Its business has grown at a CAGR of 10 per cent in the last 10 years on a base of 4 per cent growth a year ago, while showcasing an improvement of 530 bps in EBIT. HUL is set to derive synergistic benefits from its merger with VDFPL and GSK CH India by way of cost efficiencies and streamlining of overlapping infrastructure. Notwithstanding macroheadwinds, HUL has managed to power through on the back of strong brands, economies of scale and responsive execution. By virtue of these factors, we recommend our reader-investors to HOLD this stock. 

In the face of concerns such as increase in crude oil prices and the alarming deterioration of the Indian rupee against the US Dollar, HUL's strategy involves focusing on volume driven growth and improvements in operating margin. 

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