Hindustan Unilever Ltd.

NSE: HINDUNILVR | BSE: 500696 | ISIN: INE030A01027 |Industry: Personal Products
|Expensive Performer
2133.05 -5.15 (-0.24%)
NSE Dec 01, 2020 15:31 PM
Volume: 2.2M

Hindustan Unilever Ltd.    
19 Nov 2020
A well-timed acquisition drives growth for HUL

by Suhani Adilabadkar

After 125 years, Lifebuoy is still going strong. And so is its maker, Hindustan Unilever. With a good understanding of the pulse of the market and consumer behavior, HUL has since 1957 evolved into a dominant Indian player and FMCG behemoth. 

India’s largest FMCG business reported resilient September numbers amid Covid related uncertainty, cautious consumption and unpredictable consumer behavior. With over 44 brands spanning 14 distinct categories, HUL brands are part of the daily lives of millions of consumers across India, and often serve as a good consumption proxy. Starting with Lifebuoy launched in 1895 by the Lever brothers, HUL is behind well known names, including Pears, Lux, Brooke Bond, Close Up, Dove, Sunsilk, Lakme, Bru, Surf, Rin, Vim and the recent inclusions Horlicks, Boost and VWash. The FMCG major has almost trebled investor wealth over the past five years. 

Quick Takes:

  • Operating revenues stood at Rs. 11,683 crore rising 15.6% YoY and operating profit jumped 16.6% YoY and PAT at Rs. 1974 crore grew 8.6% YoY in Q2 FY21.
  • Food & refreshment was the star performer with 83% YoY growth in revenues while home care revenues fell 2%, and beauty & personal care reported flat numbers.
  • Excluding the GSK nutritional business, quarterly revenue growth stands at 19% YoY for the foods & refreshment segment in Q2 FY21.
  • 80% of HUL’s revenues  come from health, hygiene and nutrition which altogether grew 10% in Q2 FY21.
  • Through the GSK consumer health acquisition, HUL has forayed into the health food drink category. This category is worthRs. 8,000-10,000 crore. 

July-September Quarter FY21 

HUL showed resilience in the July-September quarter helped by the food & refreshment segment, while home care and beauty & personal care revenues were flattish. Operating revenues came in at Rs. 11,683 crore in Q2 FY21 against Rs. 10,105 crore in the same period a year ago. That is a 15.6% YoY rise in operating revenues. 

PAT grew 4% sequentially and 8.6% YoY at Rs. 1974 crore in Q2 FY21 against Rs. 1818 crore same period last year. The company witnessed unprecedented inflation in tea at, roughly 50-70% along with elevated palm oil prices during the quarter. Operating profit jumped 16.6% YoY to Rs 2925 crore in Q2 FY21. Margins expanded by 22 bps to 25% despitespite high raw material costs, aided by cost cutting measures and lower advertising and promotional spends. 

Commenting on the Q2 results, Mr. Srinivas Phatak, CFO and Executive Director, Finance and IT, HUL said, “The operating environment has improved progressively during the quarter as lockdowns eased and economic activity picked up.” 

Powering Through Multiple Crises

HUL has the distribution strength and financial muscle to weather multiple crises like demonetization, GST, and the current Covid predicament. The company launched more than 100 SKUs over the last 6 months. Coming to the September quarter FY21, while the food & refreshment segment accelerated its growth pace, home care and beauty & personal care segments stabilized. Home care which earns HUL 30% of its revenues, saw revenues fall 1.5% YoY due to lower fabric wash consumption. This was due to consumers living and working from home. However,household care reported double digit revenue growth. 

The company  had a number of new launches, including Surf Excel Anti-Germ Wash Booster, Vim Antigerm Bar, Vim scrubbers, Domex wipes, and expanded the Domex range pan India in September quarter FY21. Beauty & personal care segment (40% of revenues) after dipping 12% in the June quarter, regained some of its lustre, rebounding slightly in Q2 FY21. 

Skin cleansing, oral care and hair care performed well with double-digit growth. Lifebuoy continued with its stellar performance, Lux reported good numbers while Close Up saw double-digit growth in oral care. The foods & refreshment segment (30% of revenues) rose 83% YoY, growth without ice creams or any out of home consumption.  It was instead the Kissan and Knorr range, Tea with its stellar performance, and Coffee with its volume led growth, that aided growth in revenues of the food & refreshment segment. Even Boost and Horlicks, and the nutritional business bought from GSK aided revenue growth.

GSK Acquisition Drives Growth

The GSK Consumer Healthcare (India) acquisition could not have happened at a better time for HUL. In Q2 FY21, while reported revenue growth stood at 15.6% YoY excluding nutritional business (GSK) and VWash acquisition impact, business grew at just 3% with underlying volume growth of 1%. 

HUL has been following an age-old strategy for the past several years, where it identifies white space in its product portfolio and fills it up by acquiring profitable businesses with strong brands. Ponds, Lakme, Brooke Bond, Lipton, Indulekha have all been brought into HUL through a string of acquisitions. 

In the recent scenario, its nutritional business has come to its rescue. So even if people do not go out, do enough laundry, use cosmetics or deodorants, or eat ice cream, the recent focus on  health and immunity has made the acquisition of Boost, Maltova, Viva and Horlicks look fortuitous. 

Horlicks is the market leader owning almost half of the HFD segment. The entire GSK portfolio included from 1st April 2020 is running through its second quarter and has pushed the food & refreshment growth trajectory to 83% YoY in Q2 FY21. 

Excluding the GSK nutritional business, quarterly revenue growth stands at 19% YoY for the foods & refreshment segment in Q2 FY21. This looks strong in the present scenario, and top brokerage houses and analysts have either retained their buy calls or upgraded HUL, as the HFD segment has further diversified and strengthened its resilience. The full synergistic benefits of the purchase of GSK’s nutritional business will start accruing from January-February 2021 onwards.

But what has also impressed the analyst community is recovery in HUL’s discretionary and out of home consumption segments. Discretionary products constitute 15% of revenues and out of home consumption 5%. These two segments saw revenues fall 45% and 69%  in the June quarter FY21. Both are now on the mend with revenues improving sequentially with a lower decline of 25% in Q2 FY21.

As the economy recovers, lockdown restrictions loosen and operations normalize, discretionary and out of home consumption recovery will further gather pace. And with 80% of the  business constituting health, hygiene and nutrition which altogether grew by 10% this quarter, HUL is cautiously optimistic. Speaking on growth prospects, Mr Phatak said, “Looking ahead, while the outbreak of COVID-19 has disrupted businesses massively, we believe that the worst is possibly behind us from an economic standpoint. And therefore, we are cautiously optimistic about the business”.

Hindustan Unilever L.. has an average target of 2419.75 from 15 brokers.
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