Hindustan Unilever Limited: Strong market presence and linkages with Unilever Plc should support growth

Financial risk profile of Hindustan Unilever Limited is strong and is being supported by healthy operating cash flow, nil gearing, largely unutilised bank lines and stable net worth. The company has high operating efficiency due to its strong distribution network, geographically-diversified production facilities and linkages with parent, Unilever Plc.

Hindustan Unilever Limited

Company profile:

Hindustan Unilever Limited has been categorised as India’s largest fast moving consumer goods (FMCG) company having 90-year heritage in India. The company believes that 9 out of 10 Indian households use one or more than one of its brands. It has a wide and resilient portfolio of more than 50 brands, spanning throughout 16 FMCG categories, which form part of everyday life of millions of consumers across country.

The company, which has a turnover of ~INR58,154 crores (in FY23), is a subsidiary of Unilever, which is world’s largest supplier of Food, Home Care, Personal Care and Refreshment products. It sells its products in more than 190 countries.

Business model of Hindustan Unilever Limited

HUL is engaged in manufacturing more than 65 billion units annually, and then these are made available to its consumers with help of 9 million retail outlets and several digital commerce platforms. Business strategy of the company helps integrating sustainability throughout business operations, which enables the company in delivering 4G growth, growth which is consistent, competitive, profitable and responsible.

Portfolio of the company includes renowned household brands including Lux, Lifebuoy, Surf excel, Rin, Wheel, Glow & Lovely, Pond’s, Vaseline, etc. The company is a consumer goods company situated in India. Therefore, its business model is mainly focused on production and distribution of fast-moving consumer goods (FMCG) including personal care products, F&Bs, and home care products.

Track record of management

Mr. Rohit Jawa: Mr. Rohit Jawa is Chief Executive Officer and Managing Director of Hindustan Unilever Limited. He is also President, Unilever, South Asia, and is a felicitated member of Unilever Leadership Executive (ULE). He has strong track record of sustained business results throughout India, SE Asia, and North Asia. In its capacity as EVP North Asia and Chairman Unilever China, he transformed the company’s business into Unilever’s 3^rd largest globally. He established distinct strategic agenda for China, and successfully used digitalisation and premiumisation.

Mr. Nitin Paranjpe: He is the company’s Non-Executive Chairman and a chief transformation and chief people officer at Unilever. He has been member of Unilever Leadership Executive since October 2013. He was Unilever's Chief Operating Officer (COO) and was responsible for delivering in-year results (P&L) for Unilever globally with help of leveraging synergies and establishing future capabilities. Before becoming Unilever COO, Mr. Nitin was President of Foods & Refreshment for Unilever. Between 2013 to 2017, Mr. Nitin was President of Unilever's Home Care Division.

Mr. Ritesh Tiwari: Mr Ritesh Tiwari, aged 46, is the company’s Executive Director, Finance & IT and Chief Financial Officer. Apart from this, he is a Chief Financial officer for Unilever, South Asia. He is a global finance leader, having rich experience in managing diverse teams throughout UK, India, and other Asian markets.

Financial performance of Hindustan Unilever Limited

HUL saw resilient and competitive performance in 1Q23, with underlying sales growth coming at ~7% and underlying volume growth of 3%. EBITDA margin was 23.6% and this exhibits a rise of 40 bps year-over-year. PAT before exceptional items went up by ~9% and Profit After Tax (PAT) was up by ~8%. Home care saw another quarter of strong performance as segment delivered 10% revenue growth and mid-single digit underlying volume growth. Both Fabric Wash and Household Care went up by double-digit supported by focused market development actions and premiumisation.

EBITDA margin of the company came in at ~23.6%, which was up ~40 basis points year-over-year. PAT of the company came in at ~INR2,472 crores, which was up 8% year-over-year. In comparison to 4Q22, gross margin of the company grew by ~140 bps and A&P (Advertising & Promotions) stepped up by ~110 bps. The company continues to manage its business dynamically to support savings and offer right price-value equation to consumers. Focus of the company remains on building back its gross margin and investing competitively in A&P.

The company saw another year of solid all-round performance in FY23. Turnover of the company came in at ~INR58,154 crores, exhibiting a rise of ~16% with underlying volume growth of ~5%. Growth was ahead of market with over 75% of the company’s business winning both value and volume-market shares. Net profit of the company went up by ~13% to INR9,962 crores. Earnings per Share (EPS) came in at INR42.4, up by 13%.

In a challenging environment, which was characterised by unprecedented inflation and significant decline in market growth, the company dynamically managed its business to grow consumer franchise and protect business model.

Industry analysis

Hindustan Unilever Limited is part of FMCG industry, which is one of biggest long-term sustainable business opportunities which India offers. Even though India is one of fastest growing markets globally for FMCG products, its per capita FMCG consumption is still amongst lowest globally, which provides a huge runway for growth.

India continues to undergo rapid digitisation and new-age technologies are transforming FMCG market. As a result, there are opportunities for brands, consumers, and customers alike. Digital commerce continues to gain more relevance as consumers are moving between online and offline channels of trade. Traditional trade players continue to reinvent their business models to play critical role in new digital India.

Indian FMCG industry is expected to compound at ~14.9% and should grow from US$110 billion in 2020 to US$220 billion in 2025 and to US$615 billion by 2027. Growth is expected to come from increased focus on growing small-pack segment to improve penetration. Focus should be on increasing footprint in geographies which show greater potential for growth, in both rural and urban markets.

Future prospects of Hindustan Unilever Limited

In near term, operating environment might remain volatile due to global slowdown risks and weather-related uncertainty. Even though inflation has moderated, commodities remain elevated vis-à-vis long- term averages. The company expects that price-volume growth should rebalance. Price growth will tail off because of lapping of increased prices in base and sequential easing of inflation. Gradual recovery should be there in market volumes as consumption habits tend to readjust with a lag.

Focus of the company is on managing business with agility and growing consumer franchise while sustaining margins in healthy range. The company has contingency plans designed to enable it to secure alternative key material supplies which should help it in navigating supply chain risks. Commodity price risk is expected to be managed through forward buying of traded commodities, other hedging mechanisms together with product pricing.

Evolving demographics including rising affluence, significant young working population, rise in nuclear-family structures, urbanisation, and higher use of technology continue to rapidly change consumer preferences and HUL should be in a position to capitalise growth opportunities. Consumers continue to become more discerning (i.e., they look for superior products) and this trend is expected to continue for foreseeable future, further helping Hindustan Unilever Limited.

Shareholding pattern of Hindustan Unilever Limited

Promoters of Hindustan Unilever Limited continue to hold ~61.90% of total shareholding and this percentage of holding has remained consistent since past few quarters. While ~14.48% is being held by FIIs, ~11.47% of total shareholding is being constituted by DIIs.

Since holding percentage of promoters has remained consistent over past few quarters, it means that interests of promoters are aligned with those of shareholders. It means that promoters are optimistic about growth potential of Hindustan Unilever Limited.

Risks

Supply chain network of the company can see potentially adverse events including physical disruptions, environmental and industrial accidents, labour unrest, trade restrictions, etc. Cost of products can be significantly impacted due to cost of underlying commodities and materials. Any fluctuations in such costs can negatively impact business of the company.

Uncertain macro-economic outlook and geopolitical uncertainties can impact consumer demand for its products, disrupt sales operations, and impact profitability of the company’s operations. Therefore, prolonged and accentuated inflationary pressure, higher unemployment and decline in disposable incomes can result in significant demand shocks.

Valuation and investment rationale

Stock of Hindustan Unilever Limited trades at ~56x of FY23 EPS, which is at a discount to sectoral average of ~64.32x, hinting that investors should consider going long on this stock.

Growth in stock price is expected to be supported by the company’s leading market position throughout categories in FMCG industry, strong financial risk profile and healthy operating efficiency. Synergies from GlaxoSmithKline Consumer Healthcare Ltd (GSKCH) merger is expected to enhance market position of the company in foods and refreshment segment and should improve revenue diversity in medium term. Plans are there to increase penetration of Boost and Horlicks in rural regions as the company launched smaller stock-keeping units.

Strong innovation and premiumisation strategy and benefit of integration of nutrition business should help achieve healthy growth in medium term.

Articles

Comments