Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hindustan Lever: Indian FMCG’s crown jewel - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Feb 16, 2002

    Hindustan Lever: Indian FMCG’s crown jewel

    Hindustan Lever (HLL), a 51% subsidiary of Unilever, is India’s largest FMCG company with sales of Rs 110 bn (2001). It forms around 5.5% of Unilever’s global turnover and a sizeable 32% of Unilever’s Asia Pacific business. The company’s topline has registered at a CAGR of 20% in the last 10 years. Its profits have logged in CAGR of 36% over the same period.

    If you had invested Rs 10,000 in HLL in 1992, your investment would be
    worth Rs 105,860 at current prices (CAGR 29%).This is excluding
    the dividends of over Rs 119 that HLL has paid per share in the past 10 years.

    However, in the last few years, HLL’s topline growth has shown signs of tiring. In the last 4 years, HLL has recorded a topline CAGR of 5%, which is largely due to the sluggishness prevailing in the economy. Soaps and detergents contribute nearly 48% of HLL’s topline. This segment is one of the worst affected during the slowdown.

    Globally, Unilever is changing the way it does business. The Group is no longer interested in having a large number of brands and product offerings in the FMCG spectrum. Instead, it is looking at scaling down and concentrating on those businesses that contribute substantially to its bottomline. It has exited adhesives and specialty chemicals business in the last few years. It is looking at margin expansion in all its businesses.

    HLL is following the parent’s strategy of refocusing its efforts on its core business and brands. It has initiated measures to prune the number of brands from 110 down to 40. HLL found that only these 40 brands contributed around 90% to the turnover and over 110% to its bottomline. Apart from this, the company is exiting businesses to lend focus to its business plan. In the last couple of years, HLL has exited the businesses of animal feeds, speciality chemicals and seeds. Leather and marine export businesses are next in line. The hiving off of businesses will bring in extraordinary income for the company going forward. In 2001, HLL has earned Rs 1.6 bn through sale of non-core businesses. These efforts have resulted in margin expansion for the company. Its operating margins have improved from 10.7% in 1998 to 15.6% in 2001. Though this trend is well poised to continue in future too, the margin expansion going forward is likely to slow down.

    That said, HLL’s product profile is quite different from the parent. While soaps and detergents contribute only 21% to Unilever’s topline, in HLL’s case the contribution is nearly 48%. Similarly, while the foods business accounts for 55% of Unilever’s total folio, it is only 27% for HLL.

    Even within the food portfolio, HLL’s product mix is quite different from its parent. Tea & coffee (beverages) form 59% of HLL’s total food business of Rs 30 bn, while ice creams form only 5.0% of HLL’s food portfolio. On the other hand, for Unilever, ice cream and beverages form 29.4% of the company’s food basket. In effect, tea is smaller globally for Unilever but big for its Indian operations. This clearly indicates that though HLL is attempting to move towards aligning its portfolio with its parent, this may not be possible in entirety due to geographical food habits. (Another example is that while Unilever sold its bakery business in the year 2000, HLL is contemplating spreading its presence in this segment in India).

    This detergent skewed mix in the case of HLL will undoubtedly change in the coming years. Going forward, its foods business is going to be the growth driver. This will happen as a result of two main reasons. For one, sales growth in soaps and detergents has slowed down to single digits in the last couple of years. It forms one of the most heavily penetrated FMCG segments in India. On the other hand, processed and staple foods are expected to grow much faster due to the penetration levels being much lower (15%-20%). The second reason in favour of processed food business growth is that the Indian consuming class is slowly but surely changing. Right now, HLL may face hurdles in terms of consumer acceptance of ready to eat and processed staples. However, going forward, with increased promotion, awareness and women entering the workforce, acceptance of these products is likely to rise. India is where the western countries were say 15-20 years ago, and habits are likely to evolve as they did in the western markets (but only much faster).

    Source: HLL Investor presentation, CLSA, Hong Kong, May 2001

    All the above reasons have contributed to the belief that a turnaround in HLL’s fortunes is around the corner. However, ground realities are different.

    While soaps and personal products have grown by 8% and 10% respectively in the first nine months of 2001, ice creams and branded staple foods have shown a YoY decline of 9% and 8% respectively. We did a small exercise wherein we assumed that in the next five years personal products and soaps will grow at a 5% growth rate, staples, culinary, bakery items grow at a stable 10% YoY and ice-cream beverages grow at 5%-8% each year for the next five years. Though these assumptions may deviate from the actual results, they highlight that food is not likely to generate enough impetus for HLL’s topline due to its weightage in the revenue mix. Below is a sample of the sales mix that emerged in 2005E.

    HLL's sales mix
      2001 2005E Unilever in 2001
    Soaps & detergents 47.8% 46.3% 20.7%
    Personal Products 21.2% 20.5% 23.6%
    Staples, culinary and processed food 4.1% 4.8% 23.1%
    Ice-cream and beverages 19.9% 20.4% 16.4%
    Oil and dairy based foods and bakery 7.0% 8.2% 16.3%

    As we can see, to replicate the parent’s model by 2005, HLL will have to push much harder. In due course, HLL will undoubtedly reflect the parent, but it seems unlikely to happen in the medium term. However, growth can be bought. HLL could mirror the parent in terms of increased food contribution through inorganic growth. ‘Bisleri’ and ‘Bailley’ (bottled water) and Parle (bakery items) are the two likely acquisition targets going forward. One can expect HLL to woo these and others to consolidate its food business. On the flip side, HLL could have to pay a sizeable sum to secure them.

    HLL’s growth is directly linked to growth of the Indian economy. Even in a sluggish scenario like 2001, the company has managed to grow its topline (though only in single digits). The company will be the biggest beneficiary when the economy turns around and rural demand picks up. Also, penetration levels for a majority of products, especially in the food business, are still low (between 20%-30%). This indicates immense potential for Unilever in India over the long term.

    Though there are no concrete numbers to back this hunch, the feeling is that HLL has already spent a bulk on setting up its distribution infrastructure. It is amongst India’s best technologically connected company internally. So its systems are in place. Before expanding its ice-cream and frozen desserts reach, HLL recognised the need for setting up cold storage chains across India. Therefore, as early as 1998, HLL earmarked Rs 2 bn for setting up cold storage chains. This capex has already been done. Because of its distribution strengths (over 850,000 retail outlets in December 2000), HLL’s new products reach the shop shelf faster as compared to competition. In effect, the cost of launching new products will decline at a faster pace and further aid margin expansion.

    Bottomline, though HLL is a solid defensive stock to have in one’s portfolio, acquisitions and recovery in demand are the short-term triggers.



    Equitymaster requests your view! Post a comment on "Hindustan Lever: Indian FMCG’s crown jewel". Click here!


    More Views on News

    Marico: Earnings Hit by Lower Volumes and Firming Input Prices (Quarterly Results Update - Detailed)

    Aug 9, 2017

    While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.

    HUL: A Slow End to a Dull Year... (Quarterly Results Update - Detailed)

    May 9, 2016 | Updated on May 11, 2016

    HUL announced its results for the quarter and year ended March 2016. While revenues rose by 4% YoY, net profits increased by 7% YoY.

    Hindustan Unilever: Deflationary Pressures Curb Growth (Quarterly Results Update - Detailed)

    Jan 21, 2016

    HUL announced its results for the quarter ended December 2015. While revenues were up by 3% YoY, profits came in lower by 22% YoY.

    Hindustan Unilever: Fails to meet expectations (Quarterly Results Update - Detailed)

    Oct 16, 2015

    HUL announced its results for the quarter ended September 2015. While revenues were up by 4% YoY, profits came in lower by 3% YoY.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 (Close)


    • Track your investment in HIND. UNILEVER with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks



    Detailed Quarterly Results With Charts