CAN UNILEVER MAKE HORLICKS TALLER, STRONGER & SHARPER?

Ever since GSK announced in that it’s putting Horlicks on the block the world wanted a sip. As per media reports, at some point or the other there was interest from Coca-Cola, Pepsico, ITC, Unilever, Nestle, Mondelez and even some private equity players among others. Even Zydus-Cadila was in the fray until it became a Complan boy in October.

ZYDUS BUYS COMPLAN

Zydus Wellness bought Heinz brands: Complan, Glucon D etc for 4595 Cr

Zydus Wellness acquired Complan for 4X FY18 EV/Sales, 20X EV/EBITDA

Date: Oct 24, 2018

As the race for Horlicks nears the finish line, it seems Unilever has a lead over closest competitor Nestle. While investors of GSK Consumer will be eyeing a lucrative deal-price and the promise of an open offer. Shareholders of Hindustan Unilever will await an eventual merger between GSK Consumer and HUL, once the deal is consummated between Unilever & GSK. For the business, however, it’ll be interesting to see if Unilever’s strength can fortify Horlicks.

What’s in it for GSK Cons shareholders?

Deal at a premium to CMP

The promise of an open offer

What’s in it for HUL shareholders?

Promise of an eventual merger of GSK Cons & HUL

If reports are to be believed, for $3.4bn, Unilever stands to benefit from this deal. Basic arithmetic indicates a revenue addition of 12.5% & EPS addition of 15.5% to Unilever’s India biz for a price that approximates between 8-10% of HUL’s current market capitalization. This without accounting for synergies.

How financials stack up?

FY18                               HUL                GSK CONS

Revenue                     34525 Cr             4317 Cr

EBITDA Margins          21.1%                  20.5%

PAT                              5237 Cr                700 Cr

H1FY19                       HUL                GSK CONS

Revenue                     18721 Cr             2379 Cr

EBITDA Margins          22.8%                 24.5%

PAT                              3054 Cr                476 Cr

HUL

Addition to Revenue        +12.5%

Addition to PAT                 +15.5%

Price for GSK CONS = 8-10% of Co’s Market Cap

Can the powers combine? If HUL is able to leverage Horlicks’ brand strength with the mighty reach in every nook and cranny of India, there’s a strong case for immense value creation.  With the purchase of GSK Cons, HUL gets access to more than half of India’s MFD (Malted Food Drinks) Market.

GSK CONS STRENGTH

Market Share

Horlicks: 43.3%

Boost:     10.9%

#As Of SEP-2018

While clouds of stagnation, deceleration and health consciousness have been hovering above the MFD Industry, there are few silver linings for HUL. To start with, Horlicks’ brand recall and strong positioning is beyond question. It’s an iconic brand with a loyal customer base. Secondly, while health consciousness is keeping people away from high levels of sugar in MFDs, the same awareness is bringing them closer to the wide array of high protein and other nutrition heavy products that are gaining shelf space. Finally, smaller sachets of Horlicks are showing high double-digit growth. Pump these sachets through HUL’s wide network and you have Horlicks oozing from the nation’s veins.

Horlicks Strength

1)      Strong Brand Recall

2)      New Launches in Protein doing well

3)      Sachets volumes grows high double digit, led by distribution

DISTRIBUTION           TOTAL REACH         DIRECT REACH      RURAL REACH

HUL                                   7m                                    3.4m               ~4.5 Lk Villages

GSK CONS                        1.8m                                 0.8m              ~22000 Villages

            

8 out of 10 Horlicks packs are sold in the Southern & Eastern part of the country. There is a huge opportunity for HUL to expand into North & West India.

GSK Cons Revenue breakup (region wise)

1.            North – 8%

2.            South – 42%

3.            East – 39%

4.            West – 5%

5.            Exports – 8%

Over the long term, there is a huge scope for Unilever to reduce inefficiencies, optimize marketing spends and recalibrate GSK Consumer’s expenses to ensure that GSK Consumers’ higher gross margins percolate to the EBITDA and Net Profit. HUL will definitely look at lowering the slip between Horlicks’ cup (Gross Margins) and the lip (EBITDA Margins).

COST OPTIMIZATION OPPORTUNITY

FY18                          HUL               GSK CONS

Gross Margin           53%                   67%

EBITDA Margin        21.1%               20.5%

However, a risk that looms large is HUL’s patchy past with respect to acquisitions. While Kissan has been a success, Unilever’s inability to turn Modern Bread around and failure to gain strong traction in Annapurna Atta, Captain Cook and Tarla Dalal among other Best Foods brands will keep investors on the edge.

HUL’s Patchy Past:

Bought Modern Bread in 2001 from Govt, failed to grow it, sold in 2016

Failure to gain strong traction in Annapurna Atta, Captain Cook, Tarla Dalal, Best Foods brands

While the ingredients for a potent potion are in place, only time will tell whether Unilever can make a great meal out of Horlicks or will the latter be a difficult cup to digest.

Much Love.

M

PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

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