GST windfall underpriced:
GST Council’s decision to reduce the tax rate on premium consumer goods by 10% (from 28% to 18%) could turn out to be significant tailwind for the FMCG sector. Owing to the GST rate cut, the long term growth rate for home personal care segment could increase by 2%-3% supported by improved market penetration, higher per capita consumption and premiumisation. HUL has around 40% of its portfolio under the 28% tax bracket, higher than its peers. HUL was proactive in reducing prices and has gone for price cuts ranging from 7%-24% in product categories such as hair care, skin care, foods and detergents.
Innovation to lead to margin expansion & premiumization trend to remain strong:
HUL continues to strengthen its innovation agenda in mid-to-premium brands like Lifebuoy, Surf, Dove, etc. It is also focusing on smaller but potentially large segments like air purifier. To increase its digital presence, HUL recently launched a mobile application called Skin Advisor Live (S.A.L.). These initiatives will help the company in increasing brand awareness and expanding its reach and ultimately lead to margin expansion. The company has conducted detailed studies on inflection points in major premium products at each level of per capita income across countries. This enables the company in allocating a disproportionately higher proportion of resources to such segments which in turn helps in facilitating a faster move toward premiumization. Using the price reduction and lower unit pack (in premium products) strategy the company will look to upgrade customers to premium products wherever possible.
HUL is creating huge barrier to entry via use of technology:
The company is facilitating faster decision making via use of technology (analytics of data). Data analytics also gives it enough understanding of what SKUs to sell in which store in the country and what areas need direct coverage. Use of fully robotized warehouses and artificial intelligence (AI) in decision making will take HUL’s already enviable capabilities to the next level.
Rural outlook turning positive:
The management believes much of the pain (due to GST led disruption) is now behind. Demand should pick up going forward. Good monsoon, increase in MSPs and increased government allocations for rural augur well.
Focus on naturals segment:
The prominence of natural products is set to increase going forward. The parent company (Unilever PLC) has been proactive in foraying in the naturals/herbal/Ayurvedic segment. The recent buyouts of Schmidt Naturals and Sundial brands signify the vision of the company to expand in the naturals category. Some of these brands could have salience for India in future. The company is introducing naturals across categories i.e. personal care and home care and is already growing well ahead of the market. The presence of naturals portfolio at the parent level gives HUL an edge over local players and will enable it to capture the high growth opportunities in the Indian market which is currently dominated by Patanjali. Unilever PLC is focusing on growth of core brands, streamlining the supply chain, and cost savings leading to operating margin expansion. These measures could flow through its Indian operations as well.
Fast moving consumer goods (FMCG) is the 4th largest sector in the Indian economy. There are three main segments in the sector – food and beverages which accounts for 19 per cent of the sector, healthcare which accounts for 31 per cent and household and personal care which accounts for the remaining 50 per cent. The FMCG sector has grown from US$ 31.6 billion in 2011 to US$ 49 billion in 2016. The sector is further expected to grow at a Compound Annual Growth Rate (CAGR) of 20.6 per cent to reach US$ 103.7 billion by 2020. Accounting for a revenue share of around 60 per cent, rural segment is the largest contributor to the overall revenue generated by the FMCG sector in India and recorded a market size of around US$ 29.4 billion in 2016 and is expected to grow to US$ 220 billion in 2025. Demand for quality goods and services has been going up in rural areas of India, on the back of improved distribution channels of manufacturing and FMCG companies. Semi-urban and urban segments accounted for a revenue share of 40 per cent in the overall revenues recorded by FMCG sector in India. Growing awareness, easier access, and changing lifestyles are the key growth drivers for the consumer market. The Government of India's policies and regulatory frameworks such as relaxation of license rules and approval of 51 per cent Foreign Direct Investment (FDI) in multi-brand and 100 per cent in single-brand retail are some of the major growth drivers for the FMCG market.
Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods company with a heritage of over 80 years in India. On any given day, nine out of ten Indian households use HUL products to feel good, look good and get more out of life. With over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit. The Company has about 18,000 employees and has a net sales of INR 33,895 crores (financial year 2016-17). HUL is a subsidiary of Unilever, one of the world’s leading suppliers of Food, Home Care, Personal Care and Refreshment products with sales in over 190 countries and an annual sales turnover of €52.7 billion in 2016. Unilever has over 67% shareholding in HUL.
|Profit Before Taxation & Exceptional Items||5523.10||5977.00||6155.00||7120.90||8104.10||9340.9|
|Exceptional Income / Expenses||664.30||-31.00||241.00||0.00||0.00||0.0|
|Profit After Tax||4315.30||4137.00||4490.00||5076.30||5673.40||6496.6|
|Share of Associates||0.00||0.00||0.00||0.00||0.00||0.00|
Good monsoon, increase in MSPs and increased government allocations for rural augur well for the company. We expect revenues/PAT to grow at 8.9%/13.0% CAGR over the next 3 years (FY17-20E). We value HUL at 54.4x FY20E EPS of Rs. 30.0 and recommend a ‘Buy’ with a target price of Rs. 1635 giving an upside of 20%.