GSK Launches book to sell HUL Stake, What Does it mean for HUL shareholders?

GSK PLC launched book to sell 5.7% stake in Hindustan Unilever today. The large trade is likely to take place on the exchanges in the price range of 1850-1950 per share (discount of 3-8% from CMP).

HUL had issued shares in the ratio 4.39:1 to all GSK Consumer shareholders as part of deal to acquire Horlicks & Boost from the latter in December 2018.

The important part about this trade is that GSK is looking to sell the entire stake worth $3.5 Billion (27000 Crore) in one large trade instead of part sale. That removes future supply overhang on the stock. 

I’ve learnt from sources that the buyers are likely to be institutions, both, foreign and domestic. This eliminates the possibility of HUL’s parent Unilever PLC buying the stake from GSK. Remember, as part of dilution due to the merger, Unilever’s stake in HUL reduced to 61.9% from 67.2%. 

As a result of Unilever’s stake dilution, the free float (public shareholding) of Hindustan Unilever increased from 32.8% to 38.1%, thereby resulting in an increased weightage on the Nifty and other passive indices like MSCI etc. With the elimination of Unilever buying this stake, the fear of reduction of this increased free float goes away.

GSK’s impending sale was among the many reasons that kept a lid on HUL’s stock price over the last one month where it corrected 23% from record high of 2614 on April 8^th to 2010 today. The other reasons of underperformance were; weakness in business due to Covid-19, expensive valuations of 64X FY21e and some profit booking after a stellar 54% run in last 12 months and 180% in last 3 years.

With GSK’s supply overhang out of the way, street is likely to focus on the key upside triggers for the stock going forward. The management sounded cautiously optimistic on the way forward, in its post Q4 earnings call and recovery post COVID would be a key trigger post COVID-19. History has taught that HUL has been the company that bounces back the fastest after any disruption. We saw that with great launches in the Naturals space after Patanjali’s disruption and strong supply systems after demonetization and GST. 

The other important trigger that the street will keep a keen eye on, will be the growth opportunities that Horlicks & Boost bring to HUL. In an interview with me in Jan 2020, Sudhir Sitapati (ED, Foods & Refreshment at HUL) did say, Horlicks is a dream acquisition due to its low category penetration and high gross margins. The company expects 1000 bps synergy benefits from this deal. Brokerages ascribe an EPS accretion of anywhere between 5-10% on account of this.

HUL has shown remarkable growth via acquisitions in the past like Pears, Kwality, Kissan, Knorr, Lipton and recent ones like Indulekha & Adityaa Milk. HUL acquired Indulekha in 2015 for 330 Cr and the brand is worth over 2000 Cr as of 2019. The final trigger would be how Hindustan Unilever carries itself into newer categories by Bolt-On acquisitions into newer categories like V-Wash and some more opportunities that may arise due to COVID related disruptions.

For all these triggers, the stock isn’t particularly cheap at 57-58X FY21e; but some would say it’s better than at 64-65X it was trading at just one month ago. Personally, however, I would love to hear HUL's mascot Lalitaji's opinion on this. Wonder if she'd say "HUL ki khareedari mein hi samajhdari hai" or not?

WHAT MARICO’S COMMENTARY TELLS YOU ABOUT THE FMCG SECTOR

WHAT MARICO’S COMMENTARY TELLS YOU ABOUT THE SECTOR

Hair Oil to Cooking Oil to Masala Oats-maker Marico reported Q4 Results that were largely in-line with street expectations and the quarterly update provided by the company. While customers stocked up Saffolla cooking oil ahead of the lockdown, they stocked down on Parachute & Value added hair oils during the period at a time when non-essential purchases are being put to the back burner. The company, on its part, also reduced non-essential expenditure on advertising to protect margins.

 

MARICO Q4FY20: Largely In-Line

Domestic Volumes Decline 3% vs Poll of 2-3% Decline

Mild Miss on Revenue, EBITDA & PAT Meet Est

Lower Ad Spends & Resilient Gross Margins aid EBITDA

Saffolla shines as people stock-up, discretionary biz sees sharp fall

 

MARICO Q4FY20 vs Poll

Revenue at 1496 Cr vs Poll at 1533 Cr

EBITDA at 282 Cr vs Poll at 278 Cr

Margins at 18.9% vs Poll at 18.2%

PAT at 199 Cr vs Poll at 192 Cr

 

However, more than the reported results, Marico’s management commentary threw some extremely valuable insights on what FMCG companies are expecting and the likely steps they will take, to navigate through the current crisis. Marico, like Hindustan Unilever, believes that near term demand is uncertain and consumer behaviour is likely to change.

 

PRODUCTS

HUL Management had indicated in its results commentary that the sector is likely to see an upswing in categories like health, hygiene and nutrition. While, in the near term, they are likely to see some adverse impact on discretionary categories and the out of home channel           

This reflects in Marico’s recent brand extensions and product launches. With the rising consciousness among consumers about personal health and hygiene, the Company introduced Mediker Hand Sanitizer in April’20. Distribution of the range is being ramped up across all channels. In April’20, the Company also launched Veggie Clean, a first-of-its-kind fruit and vegetable cleaner, made with ingredients that remove all the germs, bacteria, chemicals, waxes and soil present on the surface of fruits and vegetables without leaving any residue, aftertaste or smell. Veggie Clean will be available across Modern Trade and Ecommerce channels. In the last two months, we’ve seen Emami, Dabur, Godrej Consumer and even Asian Paints enter the sanitizer space. One can expect more such innovations from FMCG companies going forward.

PRODUCT DEVELOPMENT

Rising consciousness among consumers about personal health and hygiene

In last two months: Emami, Dabur, Godrej Consumer, Asian Paints enter the sanitizer space

Marico launched Veggie Clean, a first-of-its-kind fruit and vegetable cleaner​

 

DISTRIBUTION

FMCG Distribution has seen more challenges in the last 5 years than any other aspect of the business. With Demonetization, GST, Army CSD restructuring and the advent of modern trade & e-commerce, companies have been kept on their toes to strengthen their presence in each channel. The current Covid-19 crisis too, has thrown an interesting set of challenges.  While, the irreplaceability of your neighbourhood kiranawala has been reinforced on one hand, we are also thanking our stars for the BigBaskets & Grofers of the world. Marico in its release says, in order to cope up with the twin challenges of manpower and logistics availability posed by the unprecedented crisis of COVID-19, the Company has identified and nimbly executed a number of innovative GTM approaches. The Company joined forces with Zomato and Swiggy to use their platforms for direct delivery to customers. Post enforcement of complete lockdown, a tele-caller facility was set up to directly reach ~80K top retail outlets in the country and take orders from them. In order to ensure uninterrupted supplies to retailers, the Company tied up with start-ups like Porter, Delhivery etc. The Company also introduced a direct to home delivery portal for consumers in select metro cities. This has been critical in ensuring business continuity during the crisis. With further acceleration in online shopping and online media consumption, the Company will continue to aggressively push for growth of the E-Commerce business. While there may be no change in the manufacturing strategy, FMCG companies may have to take a relook at their stocking points to improve agility and execution in this environment

 

DISTRIBUTION INNOVATION

Marico Ties up Zomato & Swiggy

ITC Ties up with Jubilant Foodworks

Cos improve agility and execution in this environment

 

PREMIUMIZATION

In the last few years, premiumization and rising disposable income has been considered as the bedrock on which the Great Indian Consumer story laid.  However, with an impending recession and expected decline in disposable incomes, there is a strong chance that customers will start cutting corners and buy lower priced variants off the shelves. Analysts fear this would be the key near term risk for consumer companies. Marico’s commentary does indicate that the fear isn’t unreasonable. They say, consumers are likely to be more value-seeking during this economic downturn, consumer advantaged pricing and small packs will be a key focus. They also state clearly, that the Company will take a step back from premiumisation initiatives in the short term, while preparatory work in terms of R&D and proposition building will continue behind the scenes.

 

PREMIUMIZATION PULLBACK?

Consumers likely to be more value-seeking

Advantaged pricing and small packs will be a key focus

Company will take a step back from premiumisation initiatives

 

INPUT COSTS

In the current scenario, with a decline in international crude prices and a prolonged slowdown in demand looking, raw material costs are expected to be benign. However, to boost volumes and revenue, most companies are likely to pass on the benefits to consumers. This is clearly spelt out by Marico - The Company will choose to pass on the benefit to consumers and protect & grow volume growth across franchises. So maybe, those pencilling in margin expansion due to low RM Costs may have to wait longer. The company, in FY21 will strive to maintain the operating margin at FY20 levels.

 

Crises accelerate innovation, necessitate creativity and inculcate a sense of discipline, agility and focussed approach for success in the market place.  For FMCG companies, the parameters have been laid out clearly. Let’s hope that all the companies come out of this wiser, stronger and bigger.