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HLL Vs Unilever: The crown jewels!
Dec 12, 2005

It is a known fact that the per capita consumption of Indians for every FMCG product is one of the lowest in the world, and is lower even than other developing nations. This scenario is despite factoring out the Below Poverty Line (BPL) population. In this article, we compare Indiaís largest FMCG company, HLL, with its parent, Unilever, who holds a 51% stake in the Indian arm, to give a perspective of the available potential for Indian FMCG players. About Unilever
A company that needs no introduction, Unilever is one of the largest producers of some 400 packaged consumer goods. It operates in nearly all countries in Asia, Africa, North America, the Middle East, Western Europe and Latin America. The company's brand names for fragrances, frozen foods, soap and tea include Calvin Klein, Birds Eye, Dove and Lipton. Unilever is part of the Unilever Group owned by the Netherlands-based Unilever N.V. and UK-based Unilever PLC. Unilever has two global divisions, Home & Personal Care and Food. Unilever Home and Personal Care offers brands such as Dove, Lux, Omo and Surf. Today, the company is one of the world's most successful consumer goods companies.

(INR m) CY00 CY01 CY02 CY03 CY04 CAGR
Net Sales 2,569,428 2,781,756 2,606,580 2,305,422 2,169,126 -4.1%
Expenditure 2,400,408 2,514,672 2,336,202 2,009,340 1,984,932 -4.6%
EBITDA 169,020 267,084 270,378 296,082 184,194 2.2%
Operating margin % 6.6% 9.6% 10.4% 12.8% 8.5%  
Other income 2,862 5,184 5,994 3,672 6,318 21.9%
Net profit after Tax(Loss) 56,916 90,720 115,344 149,148 101,304 15.5%
Net profit margin % 2.2% 3.3% 4.4% 6.5% 4.7%  
EPS 55.1 89.6 115.6 152.3 103.7  
P/E ratio (x)         30.1  
1 Euro = 54 Indian Rupees

About HLL
HLL is Indiaís largest FMCG company with dominant presence in almost all consumer categories. The companyís turnover at Rs 100 bn is over one third of the total branded/organized FMCG market in India. HLL's brand equity remains unrivalled in India. However, in the last couple of years, the company has embarked on a major restructuring exercise focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs, or spin-offs. The effects of the initiatives had begun to show in the form of better margins. But 2004 saw competition in its key business of soaps and detergents (45% of revenues), taking a huge toll on margins.

(INR m) CY00 CY01 CY02 CY03 CY04 CAGR
Net Sales 106,038 106,676 99,549 101,384 99,269 -1.6%
Expenditure 91,397 89,536 79,990 81,617 84,895 -1.8%
EBITDA 14,641 17,140 19,559 19,767 14,374 -0.5%
Operating margin % 13.8% 16.1% 19.6% 19.5% 14.5%  
Other Income 3,451 3,818 3,845 4,598 3,188 -2.0%
Net profit after Tax(Loss) 13,101 16,413 17,557 17,718 12,012 -2.1%
Net profit margin % 12.4% 15.4% 17.6% 17.5% 12.1%  
EPS 6.0 7.5 8.0 8.0 5.5  
P/E ratio (x)         34.5  

Major Brands
HLL Unilever
Lifebuoy Lipton (tea)
Lux Omo (washing powder)
Surf Excel Dove (soap)
Wheel Axe (deodorant)
Clinic Signal (oral care)
Close-up Knorr (foods)
test
  Per-capita (US) Per-capita (INDIA)
Toothpaste (gms) 518 107
Personal Products(gms) 1,475 460
Detergents(kgs) 10 2.5
* Source : Newspapers/Equitymaster Research

As can be seen from the above tables, HLLís turnover is less than 5% of that of Unilever, despite India being the second most populated country in the world. This is mainly due to the per capita consumption in our country being way lower than the world average. However, the Indian FMCG behemoth contributes 12% to the parentís bottomline and over 50% to its other income. India has always been on the parentís radar, who has continuously introduced new products from its own portfolio here.

However, in our view, testing times for the FMCG sector are over and rural penetration is the key, which is currently extremely low, as venturing into these markets is an expensive affair owing to infrastructure constraints, thus making distribution a barrier. Although companies like HLL and ITC have started Project Shakti and E-choupal respectively, they have not been able to tap the rural markets significantly, as yet. Owing to the vast growth potential of the sector, companies like Reliance have also decided to jump onto the bandwagon and open retail chains. All these developments come as no surprise. With 12.2% of the world population living in the villages of India, the Indian rural market is a market that is hard to miss.

What to expect?
At Rs 190, the stock trades at 23 times our estimated CY07 earnings and price to sales of 3.6 times. Although at the current juncture, the stock is trading at the higher end of the valuation spectrum, one should adopt a wait and watch policy and wait for the management efforts to yield concrete results. The management has indicated in the past its focus on maintaining market share, even if this comes at the cost of margins. With crude prices showing little signs of easing in the near term, the pressure on profitability could be here to stay. We have been indicating in the past that HLL is in for tough times in the near term. While we foresee the company taking radical steps to improve its performance, the benefits will be visible only over the next couple of years. In our view, based on the current scenario, investors are better off buying other smaller and growing companies in the FMCG space.

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