By Deeksha Janiani
The Russian revolutionary leader Vladimir Lenin once said, “There are decades where nothing happens, and there are weeks where decades happen.” In recent years, Indian CEOs witnessed a whirlwind of events, from sudden demonetization and landmark tax reforms to a once-in-a-century pandemic, and an untimely war.
Sanjiv Mehta guided the ship that is the consumer goods behemoth Hindustan Unilever (HUL), through these storms. A chartered accountant by training, Mehta took charge as the CEO of HUL in October 2013 and retired after an eventful decade, on June 26, 2023.
Nitin Paranjpe was at the helm of HUL prior to Mehta, and is credited with driving the company out of its worst growth period. From 2000 to 2008, this FMCG major was growing at a muted rate of 5%, and its share price barely budged. However, the tide turned under Paranjpe’s leadership and its bottom-line growth accelerated between FY10 and FY13.
HUL has continued to grow at a healthy pace since then. Commenting on the company’s current position, Sanjiv Mehta said, “I take comfort in the fact that I'm leaving HUL stronger than before, with a larger impact on society and India.”
Rewind: HUL delivered double-digit profit growth and strong returns under Mehta
Under Mehta’s leadership, HUL’s top line rose at a decent pace of 8% and doubled in nine years. Operating profits grew faster at a CAGR of 13% on margin uptick. In absolute terms, HUL added over Rs 31,000 crore to its turnover and over Rs 8,500 crore to its EBIT.
HUL outperformed its peers with Indian promoters in terms of earnings growth and price returns. Meanwhile, P&G Hygiene and Healthcare, controlled by an American multinational, outperformed HUL on both parameters by a slight margin. But it’s important to note that PGHH has a much smaller revenue base in comparison.
HUL’s market valuation was also rerated thanks to its consistent profit growth. It is now the fifth most valuable company in India. Its trailing 12-month PE ratio, which was around 35-40X in 2014, has now surpassed 60X.
How did HUL achieve such success over the past decade? A few growth strategies implemented by Sanjiv Mehta and his team, were key.
The game plan: Mehta focused on ‘many Indias’ and premiumization
One of the very first strategies chalked out by Sanjiv Mehta was ‘Winning in Many Indias’. When he moved back to India, he realised that the country’s 29 states had less in common than, say, the 20 countries in Africa, which are similar in terms of culture, religion and language.
To address this diversity, Mehta set up 14 customer clusters which rolled into five sales branches. Earlier, there were just four sales clusters. The goal was to make products to suit the tastes of consumers in each of these clusters.
For instance, consider a tea brand like Brooke Bond. HUL adds Darjeeling tea leaves to the packaged blend it sells in the east for extra aroma and flavour. In contrast, the tea blend sold in Punjab would be formulated to deliver a stronger colour.
Mehta also focused on a premiumization strategy, offering higher order benefits to consumers at higher price points within the same product line. A perfect example of this is Surf Excel Matic powder, formulated specifically for machine wash. One kg of this now costs twice as much as the basic ‘easy wash’ variant. HUL has long battled for product leadership among premium customers in detergents - as far back as 1984, homemaker Lalitaji emphasized the value of choosing ‘a quality product over a cheap one’ in a Surf ad. Mehta adapted this for the modern Indian customer.
In addition, Mehta developed premium sub-categories within detergents. The aim was to upgrade consumers from bars to washing powders and ultimately to liquids. This strategy paid off, with the sales of HUL's liquid portfolio doubling to over Rs 3,000 crore in the past three years.
Through this strategy, HUL sought to serve consumers with higher disposable incomes, as they are more resistant to general slowdowns in consumption. And this focus continues ‘unabated’ even today.
However, the roots of this strategy can be traced back to Nitin Paranjpe’s tenure. HUL was predominantly a mass market company in India. But recognizing the rising aspirations of consumers, Paranjpe extended some popular brands into newer and pricier categories. For instance, high-end anti-ageing cosmetics were launched under the Pond’s brand in 2010.
Mehta also chose the inorganic route to boost growth in the foods and refreshments segment. Under him, HUL acquired top health drink brands like Boost and Horlicks in 2020. Notable buys in the beauty and personal care business included Indulekha, Vwash, Oziva and Wellbeing Nutrition.
Hits and Misses: Margins rose but personal care business lagged behind.
Mehta’s dual intent of winning customers across clusters, and premiumizing within product categories has given a big push to HUL’s key brands. Surf Excel and Brooke Bond, for instance, are clocking annual sales of over Rs 5,000 crore now, with the former crossing the $1 billion mark in FY23.
The focus on growing premium products has also worked well for HUL’s margins. The company’s EBITDA margins rose to 25% levels in FY20 backed by this strategy and the cost control project ‘Symphony’. Post-Covid, the company saw a big contraction in its gross margins, but the dip in EBITDA margins was limited.
Operating margins improved considerably across segments as well. The home care division, which houses HUL’s detergent brands, saw the biggest margin jump among all others.
The focus on premiumization has had some unintended consequences as well. HUL’s affordable soap brands like Lifebuoy and Lux lost market share prior to Covid. The soaps category itself grew at a dismal rate between FY16 and FY20. This may be a key reason behind the underperformance of HUL’s beauty segment. In this particular case, the former CEO was unable to capture the diverse markets within India, despite his ‘many Indias’ strategy.
The hero of the story: Home care segment excelled in profit growth
During Mehta’s tenure, HUL’s business segments were restructured into home care, personal care, and foods and refreshments in FY17 (reports also reflected FY16 numbers for the new segments). Since FY16, the turnover for both the home care and foods segments has grown at a CAGR of over 11%. Their combined share in HUL’s revenue pie rose to 60% in FY23, from around 45% in FY16.
Home care has clearly been the star performer in terms of operating profit growth over the past seven years. WIth a post-pandemic CAGR of 19%, its EBIT surpassed other segments. As people spent more time at their homes during the pandemic, this business gained traction.
Post the inclusion of Horlicks and Boost, operating profit growth posted by the foods segment has tapered off considerably. In fact, the segment’s EBIT growth was flat in FY23, making it the worst performer.
Challenges abound for the new CEO
In the past two years, HUL’s revenue growth was driven mainly by price hikes. These were taken to counter the unprecedented input cost inflation. However, volume growth was subdued, especially due to stress among rural consumers.
Sales volumes have started recovering in Q4, although the rural market is still in the negative zone. The company has started reducing prices in categories like detergents, bars and soaps in view of falling commodity prices. Going forward, the scope for price growth will be limited.
As the new CEO, Rohit Jawa, takes over, his focus is likely to be on driving higher volumes across all segments. Only then can the company sustain double-digit top-line growth. This is particularly challenging, however, in the rural context. The looming risk of El Nino could disrupt the monsoon cycle and the sustained revival of rural demand.
The new CEO should also address the lackluster growth in the beauty and foods segments since FY21. ICICI Securities expects Jawa to work on accelerating growth in the nutrition portfolio and the premium beauty segment.
Jawa has big shoes to fill, and he will be heading a venerable stable of brands, many of which are well known and beloved to Indian customers. The company owns brands known for some of the most memorable taglines and ads on Indian television (“Boost is the secret of my energy”, Shah Rukh Khan in a bathtub).
Hindustan Unilever has also been a consistent wealth compounder over the past 20 years, and investors continue to have faith in this consumer giant. All eyes will be on Rohit Jawa and the strategic route he chooses to take this legacy forward.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation