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HUL: What ails the giant?
Feb 11, 2010

Since the beginning of the current financial year, the price of Hindustan Unilever Ltd. (HUL) has dropped by 2.8%. This is in comparison with the BSE FMCG index which has moved up by 33%. Mind you, the growth would have been much higher but for the company having the second highest weightage (HUL, 18.7%) in the index. People are wondering what has gone wrong with the poster boy of the 90’s when HUL was an essential part of everyone’s portfolio. Let us explore what could be the reasons for the company’s falling out of favour. When we examine the segmental results of the company, the first thing which strikes us is that the margins of the soaps and detergents business have fallen. In 2003, the margins of the soaps and detergents business were around 25%. In 2004 they had fallen to 17% and since then have ranged from 14% to 16% yearly. The reason for this is that 2004 marked the start of the price war in laundry business with P&G. P&G a new entrant in the Indian markets had launched Ariel and Tide against HUL’s Surf and Rin. The result of has been that till date the company has not recovered its profitability in that category.

The second thing we notice is that the margins of personal products portfolio have shrunk. The category which was making margins in the late 30’s in 2003 dropped to the late 20’s. This is again a result of HUL facing competition from P&G in its shampoo business. Furthermore, the company faced competition in its Oral Care category from Colgate which has steadily increased its market share at the expense of HUL.

In the beverage category, HUL has been facing pressure from Tata Tea along with smaller regional players. Tata Tea is already a market leader in Tea in volume terms. HUL betted heavily on processed foods business. However, here too, the company is facing competition from players like ITC, Dabur and a host of regional players.

HUL also suffers from not having products across price points specially points of conversion from unbranded to branded. For example, we have seen that HUL does not have toothpaste at the entry level unlike Colgate which fields Cibaca. A person tends to stick to the same company if possible when he uptrades or downtrades. In this case, when a person uptrades, he moves to one of the many products which Colgate has in its portfolio like Colgate dental cream, Colgate max fresh or Colgate herbal cream. Colgate even has niche products like Colgate sensitive which ensures loyalty to the company.

Moreover, HUL is a large company with its sales for FY09 being Rs. 202.4 bn. As a perspective, the sales of HUL are 11.5 times that of Colgate and 14.5 times that of Godrej. Hence for any sort of growth from here on, the company will require a block buster product which in this competitive environment will be difficult to deliver.

Segmental breakup over the years
  CY03 CY04 CY05 CY06 CY07 FY09* Q1FY10 Q2FY10 Q3FY10
Revenue growth
Soaps and Detergents -0.1% 2.1% 11.0% 12.8% 13.9% 55.0% 9.5% 0.9% -2.4%
Personal Products 15.0% 2.6% 19.4% 13.8% 9.3% 46.2% 14.7% 13.4% 15.5%
Beverages -3.9% 0.9% 6.9% 4.2% 15.2% 49.7% 18.6% 18.0% 7.9%
Processed Foods -15.7% -52.7% 10.0% 22.7% 39.7% 50.8% 14.7% 0.0% 9.2%
Ice Creams -12.9% -4.8% 10.3% 39.7% 17.2% 46.4% 23.0% 8.0% 7.2%
Exports -2.2% 1.7% 7.9% -5.1% 5.0% 17.4% -34.6% -23.3% 1.0%
Others 11.9% -28.6% -11.5% -29.8% 63.1% 26.8% -6.2% 17.9% 29.7%
EBIT margin
Soaps and Detergents 24.8% 17.3% 13.8% 13.2% 15.6% 15.0% 17.2% 13.6% 13.4%
Personal Products 36.7% 32.7% 28.6% 27.5% 28.2% 26.6% 22.0% 26.3% 31.9%
Beverages 19.0% 20.0% 19.0% 15.7% 15.1% 13.4% 14.1% 17.0% 14.8%
Processed Foods 0.1% -28.7% -5.1% 2.5% 3.5% 0.2% -0.7% -0.5% -0.7%
Ice Creams 0.4% -5.3% 5.2% 12.9% 8.5% 3.7% 17.5% 5.0% -10.2%
Exports 5.0% 3.2% 3.6% 4.9% 3.5% 6.9% 8.0% 7.6% 2.8%
Others -3.9% -12.0% -11.4% -39.6% -40.5% -38.1% -35.2% -9.2% -15.6%
* 15 month year

While the company is not growing as fast as its rivals due to its large size, we must not forget that HUL has got solid brands in its portfolio as well as a vast distribution reach. We believe there is still some pain in the stock due to high commodity prices. However, we cannot write off the company. At this stage we would like to wait and watch the strategy of the management to take it to the next level of growth.

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