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.

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.

Keep The feedback Coming.

A CHAT WITH DMART'S NEVILLE NORONHA

Neville Noronha is the CEO of Avenue Supermarts, operator of retail chain D-Mart. Noronha, 43, was handpicked by D-Mart founder Radhakishan Damani to steer the hypermarket chain. In a rare and exclusive interview to CNBC-TV18's Mangalam M
aloo, Noronha said the company is not looking aggressively to expand the stores in new states. On D-Mart's philosophy, he said the ethos, the principles, the values of the business hasn’t changed since the very beginning. "We don’t want it to be changed," Noronha said. On entering the ecommerce sector, Noronha said they are just feeling their feet in the ecommerce ecosystem. "Ecommerce is our limitation," he said.

Q: How does it feel to be at the helm of a company which is loved by customers, respected by vendors, feared by competitors and adored by investors?

A: We are humbled by the response from our customers.  I feel really privileged that our customers like us the way we are and appreciate what we are doing for them.  It’s a big responsibility to retain that trust.

As far as our vendors are concerned, we probably need them more than they need us.

On competition, there is more mutual admiration rather than fear. The brick and mortar retail market allows that. It is large, extremely large. The best part is that the opportunity is available for the small, medium and large entrepreneur in equal measure. Look around your neighbourhood shopping streets. Commerce is thriving.

‘Adoring Investors' as a topic is very new to me.  All I understand is that we must run the business keeping in mind interests of all stake holders, investors obviously being an important part of that stakeholder community.


Q: What are the most important lessons you’ve learnt from Damani that have helped you shape D-Mart the way it has been?

A: Well, the answer will get too long. However, I would like to call out three distinct qualities that have had a lasting impact on D-Mart and me in particular.

A) Patience: This has been reinforced in all aspects of the business.  It’s quite a contradiction to our day to day operations. This business doesn’t tolerate patience in a lot of things. Things have to get done with a lot of swift speed.  But in a lot of other things patience is a virtue that is quite powerful.

He has been instrumental in guiding and directing all of us from that perspective in the formative years. Damani ran the entire merchandising and buying himself.  Over time we built a small team under him.  But he single-handedly built the concept of D-Mart. The idea and vision of D-Mart is his.

We all came along and brought scale to that idea through the right people, processes and technology.  He was quite convinced that his vision about the model was resilient and unique. He would always say, “you guys just need to scale this up but carefully, no shortcuts”. He only looked after Buying and Merchandising, for the rest, the principle was ‘hands off - eyes on’ and extremely high amounts of patience.  We could build what we built because of this.

B) Word is stronger than a contract document is another of his strong dictums. A lot of his past knowledge and experience in the investing business has been imbibed into D-Mart in its formative years. He would always remind us “it takes years and decades to build reputation and very little time and effort to squander it all.”  A lot of what we do is based on this principle.

C) Silence if disagreement on a point. This one is the most powerful. In the initial days, when I would make a point that he disagreed on, he would pause and reflect.  He would almost never object. Over time I would realise that his active participation in an idea meant his complete agreement while unenthusiastic reverts meant he didn’t agree. But he never prevented us from executing it.

This is one virtue of his that I personally cherish. It has allowed all of us to build a culture of empowerment across the firm yet bear a huge sense of responsibility to not lose trust and confidence bestowed upon us.

Q: Since the time you’ve joined, to now, what have been the key changes to the D-Mart philosophy and what has remained the same?

A: The ethos, the principles, the values of the business hasn’t changed since the very beginning. We don’t want it to be changed.

Everything else changes from time to time, it has to change with changing business environment. This business keeps you on the edge all the time.

Suffice to say, the cluster-based approach is such, that the opening of a D-Mart store in a new geography is a signal of many more to come there?

Let’s put it this way, that it’s a bet that can turn sour too… Hence we will never get extremely aggressive in our store expansion in new states. It’s a far more measured approach as compared to our existing markets.

Q: What are the merits and demerits of owning a store vs leasing it, how does it impact your RoCE? What’s the goal to change it and by when?

A: Owning is far more risky. But we like to do it more because we understand that space. However, leasing looks lucrative now and it also allows us to accelerate our growth. We hope to increase it. But we can’t have a target here. Irrespective of own or lease, the viability is of paramount importance.

What’s the vision with reference to D-Mart Ready and what are the growth triggers for it? How has the initial response been? How many outlets are currently operational and how do the financials stack up?

Too early to comment. It’s a pilot. We are here just to feel our feet in the ecommerce ecosystem, try and figure out what’s going on. Ecommerce is our limitation. We know very little here. We are trying to understand this.

Q: Your thoughts on the growth of Modern Trade in India? What size do you foresee it to be in the next 3, 5 and 10 years vs now and how big do you see D-Mart’s role in that to be? 

A: Indian Retail as an opportunity is phenomenal. It is unique in terms of three things constantly working and intersecting with each other.  A) Large populations and phenomenal urbanisation/agglomeration towards large cities. B) A deep, vibrant and well entrenched entrepreneurial spirit among Indian traders. C) A strong affinity towards MRP understanding even among the least literate masses of the country.

All of this actually sets up an ecosystem for offering the best products at best value. India will probably see more value retailers than the rest of the world.

Q: Warren Buffett’s quote after selling stake in Walmart in 2017: “I think retail is too tough for me. I think that Amazon in particular is an entity that's gonna have everybody in their sites. And they've got delighted customers. And it's extraordinary what they've accomplished.” Your thoughts on this from India’s perspective?

A: Hard to answer that. Only thing I would say is that Asian retailers understand the risk of ecommerce and will act much earlier and far better than the western world brick and mortar retailers.

Q: Another risk for a Retail organisation is that their strategy, pricing, product placement etc are all out in the open for competitors to see by just walking into a store. What makes D-Mart different and difficult to clone? Is Business-Model cloning a serious risk?

A: The beauty of the current opportunity is that it’s so large. Everybody has an opportunity. When I read about Walmart, Costco, Zara, Aldo, Ikea, about how they began and how they built the business, it gives every new entrepreneur an idea of what it takes to build a good business for the long term. A business that can survive, endure and expand.

There is only one Zara, or one Uniqlo, or one Walmart or one Costco. The unique character is quite visible when you visit the store, isn’t it, inspite of the ability to copy. And that is what I find very fascinating….  Nonetheless, size and scale of industry size does create opportunities to clone, however, it will be a poor copy.

Retail is detail, retail is speed and retail is a particular entrepreneur’s original thinking. You mix it together and you get a moat, clones will find it hard to catch up.

Q: What is it that a competitor has to do, to get you worried? Has the scale, size, aggression and ambition of competitors to dethrone you been successful in any geography and/or category?

A: I keep mentioning this. The opportunity is too large for retail in India. Nothing of that sort has happened in any of our markets. In most countries, some of the largest brick and mortar retailer do not control dominant share of the retail market and there are tens, hundreds and thousands of brick and mortar retailers operating. That brings colour, excitement, differentiation and numerous choices to consumers.

Digital marketplace is another issue all together. I don’t understand much there. Only thing I observe is that most countries can’t even afford to have two large digital marketplace players, whether it is merchandise, social, food delivery or taxi rides. The winner takes all as an idea is something that is worth thinking. D-Mart would love to have many equal sized, or multiple larger sized retail companies operating alongside. No fun in a race for anybody if you are the only one running.

Q: The perception of D-Mart is that of a conservative organisation, which is solely focused on low cost to offer the lowest price to the consumer. Tell us a little about the D-Mart’s back-end usage of Modern methods such as data-analytics, consumer profiling and scientific tools to optimise business?

A: We are a young team, following time tested values, mindful of waste and creating careers and purpose for employees who are ready to work hard and go beyond. If that means being conservative, we love being conservative.

We don’t have a loyalty programme and hence can’t do consumer profiling. Everything in D-Mart is available at the same price to all customers irrespective of the quantities bought.  Even in the ecommerce business, we keep very limited information. We are trying to create a fresh narrative by keeping minimal data. We hope that will resonate well with all.  Businesses can be built with such minimal data points also.

Q: Analysts, investors, stock market watchers have ambitious targets for a decade and beyond for D-Mart; do their valuation rationales and projections differ from D-Mart’s internal goals?

A: We have always maintained a stand that judge us based on our past performance. The future is dynamic and ever changing and we don’t give any projections. We have also stressed that future growth cannot be in line with past growth trends due to the base effect. As absolute revenues become larger, growth rates cannot be the same in a linear growth industry like retail.

Q: Do you ever feel burdened by the weight of market expectations? How do you maintain composure even when the market cap is 1 lakh crore?

A: I always imagine as if we are not listed. We focus on the business and our people, like before.

Q: At Walmart, frugality is attributed to this theory - “Every dollar that Walmart spends foolishly, comes right out of our customers’ pockets. Every time we save them a dollar, that puts us one more step ahead of the competition.” D-Mart bears an eerie resemblance to Walmart’s philosophy. As a company, what according to you is foolish expenditure and where will you be spending your next dollar?

A: It’s a continuous process.  Can’t pin point anything in particular.  I would say, this is more culture than anything else.  It’s a way of life.  It’s quite Darwinian.  People who don’t agree don’t stay and people who do align and stay, they make the core stronger and stronger with time.

Q: What are the threats/risks you foresee that could impede the super growth trajectory of your company? How are you tackling the threats you anticipate tomorrow, today?

A: Firstly, there is no compulsion to do super growth. We will grow at the pace we think suits us. As far as threats are concerned, which business doesn’t have threats of obsolescence? Digital, big data, machine learning, artificial intelligence, automation are interesting topics.

They are very disruptive to incumbents. All I can say is that business life cycle are shortening, significantly shortening and hence one has to have an eye on the ball all the time.  Today’s world needs a different kind of leadership. We should not forget what our core competence is and stay the course and at the same time shouldn’t ignore the water heating around oneself. It’s easier said than understood.  We struggle with it all the time, but acknowledging it, is half job done.  We are working on the other half.

Q: What are the books that have inspired Neville; what would you recommend aspiring entrepreneurs/professionals read?

That’s a trick question. One must keep reading. I’ve never had favourites. Every good book has something new to say. I keep meeting interesting and varied people and ask them the current book they are reading and I try to read on as diverse topics as possible. You never know what book’s what idea may connect and give one eureka moment or multiple aha moments. I like to read anything interesting.

One thing that fascinates me all the time post this digital revolution is that I can subscribe to that Ted talk or that periodical or that book from the comfort of my home or car so easily. It feels magical.

Q: What are your aspirations as an individual? What’s the legacy that you would like to leave behind at D-Mart, whenever you wish to call it a day? What does personal wealth mean to you?

I will answer that after 15-20 years. First, allow us to build something meaningful. There is so much to do in this country. The journey has just begun.

HINDUSTAN UNILEVER Q2FY19 RESULT UPDATE: GOOD, BUT NOT GOOD ENOUGH!

HINDUSTAN UNILEVER Q2FY19 RESULT REVIEW:

IS IT GOOD ENOUGH?

The consumption bell-weather Hindustan Unilever reported its Q2FY19 results on Friday post-market close. For the quarter ended Sept 30^th 2018, the company reported 10% domestic volume growth beating analyst expectations of 8-9%. HUL’s operating margins at 21.9% were higher than the CNBC-TV18 Poll of 21.7%. Even the reported net profit of `1525 Cr was above the CNBC-TV18 Poll of 1452 Cr. While there is no doubt that the FMCG major’ quarterly performance was good, it also opens the door for the all-important question, is it good enough?

HUL Q2FY19 Results

Revenue +11.1% at 9234 Cr Vs 8309 Cr

EBITDA +20% at 2019 Cr Vs 1682 Cr

EBITDA Margin at 21.9% Vs 20.2%

Net Profit +19.5% at 1525 Cr Vs 1276 Cr

HUL Q2FY19: Results v/s CNBC-TV18 Poll

Revenue at 9234 Cr vs Poll at 9311 Cr

EBITDA at 2019 Cr vs Poll at 2020 Cr

Margins at 21.9% vs Poll at 21.7%

Profit at 1525 Cr vs Poll at 1452 Cr

HUL Q2FY19: Key Positives

Volume growth at 10% vs Poll of 8-9%

Alert: 4^th Qtr of double digit volume growth

EBITDA Margins expand by 160 Bps

All segments saw double digit volume growth

HUL Q2FY19: THE FINEPRINT

Revenue: That’s the single most important number while analyzing a consumer company’s results. Any consumer company selling products of acceptable quality at competitive prices with a reasonable leash on overheads will be profitable. The key is to sell and keep at it. Revenue growth is a function of volume & realization/unit. To grow sales, one either sells the same number of units at a higher price or higher number of units at the same price, or ideally a combination of both.

While HUL’s 10% volume growth was higher than analysts’ expectations, the company’s revenue growth at 11% was slightly below the CNBC-TV18 Poll of 12% growth. This implies, price-led growth of ~1% was below expectations of 3-4% growth. This mild miss on the revenue front did aid the company’s reported EBITDA Margins to 21.9% vs Poll of 21.7% as the denominator was smaller. The absolute EBITDA at 2019 Cr was totally in-line with analyst expectations of 2020 Cr.

The company attributes this improvement in operational performance to their sharp focus on cost reduction and improving efficiencies. That’s good news, but again, is it good enough? More importantly, is it sustainable?

HUL’s Gross Margins (the measure of revenue over cost of production) have declined by 70 Bps year-on-year and 200 bps sequentially. Inflation in crude oil-related input costs seems to outweigh the lower prices of other non-crude oil related commodities. The pressure of higher Crude-Oil & weaker INR would only increase in the next few quarters as prices of crude-related commodities increase with a lag and contracts are renegotiated. How will this impact on Gross Margins affect the EBITDA Margin, needs to be monitored.

                                                                                                                     

Over the last year, HUL also spent 30ps less on Advertising on every Rs. 100 worth sale. In Q2FY18, HUL spent 12.3% of its revenue on advertising and promotions. In Q2FY19 However, this has reduced to 12% and that’s aided EBITDA Margin expansion. With many innovations, new launches & increasing competitive intensity, the company may have to ramp up ad spends. There is a risk that margin expansion in future, may not look as wide.

HUL Q2FY19: Mgmnt Outlook

Near term Demand outlook stable

Crude increase and currency depreciation key watch outs

To focus on volume driven growth and improvement in operating margin

PRICE, PRICE & PRICE

Hindustan Unilever has delivered double digit volume growth for 4 straight quarters now. This was aided by a favorable base, recovering demand and increasing consumer spends. The benefit of a low base has now vanished. Demand conditions as per HUL’s management have stabilized. It needs to be monitored if there is room for further improvement in demand sentiment and consumer spending in an environment of Petrol at `90/Ltr and impending Food Inflation due to MSP increase in Rabi crops.

Volume Trend

Q3FY17: -4%

Q4FY17: 4%

Q1FY18: 0%

Q2FY18: 4%

Q3FY18: 11%

Q4FY18: 11%

Q1FY19: 12%

Q2FY19: 10%

So from here, HUL’s revenue growth and the resultant profit growth will have to be price-led. The management in its post-result briefing did say they would be taking price increases as and when required, but will continue to focus on volume led growth. While volume led growth signifies market expansion, Price Led growth signifies strength in the marketplace. In this environment of increasing input prices, higher price for better products (premiumization), lower disruptions (DeMo, GST, Anti-profiteering) the stage is set for the Soap to Soup giant to showcase some market strength and report price led growth. The question is, will it choose this path?

What needs to be monitored –

Price growth in the next 4 Quarters

Volume growth for the next 4 Quarters will look bleak due to high base

Margin trend over the next 4 Qtrs given competitive intensity & input cost inflation

EBITDA Margin Trend

Q3FY17: 17.6%

Q4FY17: 20.1%

Q1FY18: 21.9%

Q2FY18: 20.2%

Q3FY18: 19.6%

Q4FY18: 22.5%

Q1FY19: 23.7%

Q2FY19: 21.9%

HUL: VALUE OR GROWTH?

This brings me to the final question: At 46X FY20e P/E (vs Recent peak of 53X FY20e P/E) is HUL a value stock or a growth stock? The answer to that lies in the path that HUL decides for the next 4 qtrs. It would be difficult for HUL to grow volumes beyond 5-7% for the next four quarters given the high base. If the company doesn’t embellish this volume led growth with some price led growth, there will be a risk to margin compression in the current environment and the concomitant profit growth may not exceed far beyond low double-digits to mid-teens, at best. That’s not growth, and at 46X, not even value. If an some-element of price growth could boost the consumer bell-weathers’ profitability, things could look very interesting and attractive.

Would these results lead to long-term investors off-loading HUL from their portfolio? Most definitely no. It is the bluest of the blue-chip investment that has created immense wealth for shareholders in the long-term.

However, for those on the sidelines waiting to buy, HUL’s iconic character, ‘Lalitaji’, the no-nonsense, smart, independent, prudent homemaker, who is conscious of her budget and yet will never compromise on the quality of products that she buys would say “Intezaar karke kharidari, Main Hi Samajdari Hai!"

 

Much Love.

M

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

Keep The feedback Coming.

THE CENTURION: PAGE INDUSTRIES BECOMES A 100 BAGGER

THE CENTURION: PAGE INDUSTRIES BECOMES A 100 BAGGER

JOCKEY’S 100X JOURNEY

PAGE IND IPO IN 2007

Issue Price: 360

CMP:   36000

The adage for horse racing, “Don’t bet the horse, bet the jockey!” couldn’t be more literally applied to this wealth creator on Dalal-Street. As the stock price of Page Ind hit `36000 mark on the bourses on Aug 28, 2018 it was a moment of reckoning as it marked the stock’s 100X journey or 9900% returns to shareholders from the IPO Issue price at `360/share.

JOCKEY’S 100X JOURNEY

Issue Price X Minimum Lot: 360 X 15 = Rs. 5400

Today Those 15 Shares = Rs. 540000

Jockey in 2007 = Saville Row Suit in 2018

While recent followers of the stock wouldn’t be surprised with these galloping moves on the stock, it’s interesting to know that the company’s IPO in Feb 2007 saw a tepid response. Applicants offered to buy the stock at the lower end of range `360-395/Sh. If that surprises you in hindsight, fathom this, Page Industries Listed on March 16, 2007 at 341.9 (5% below issue price of 360) and witnessed continuous selling to close at 282.1 that day. It took Page Industries one whole month to get past the Issue Price of 360.

JOCKEY’S 100X JOURNEY

Stock                     +100X

Revenue                 +17X

EBITDA                 +20X

Net Profit               +21X

#Since-2007

JOCKEY’S 100X JOURNEY

Revenue

FY07                 148 Cr

FY18                 2551Cr

11 Yr CAGR      30%

EBITDA

FY07                 27 Cr

FY18                 541 Cr

11 Yr CAGR      31%

Net Profit

FY07                 17 Cr

FY18                 347Cr

10 Yr CAGR      32%

However, moving beyond the stock price gains the story and growth of Page Industries has been a remarkable one. Established in 1995, Page Ind gets its name from first two letters of the name & surname of Parpati Genomal; the founders' mother. Page Industries Limited is exclusive Licensee of Jockey International Inc. (USA) for India, Sri-Lanka, Nepal, Bangladesh and Maldives. The founders, Genomal group have been associated with Jockey International Inc for over 50 Years. They have been their sole licensee in Philippines for over a decade before entering other geographies. Recently, Jockey renewed its license with Page Industries for India until 2040.

Since listing, the company’s revenue has multiplied by a factor of 17 & their profitability has increased by 21 times. This, without compromising on financial discipline, Page Industries’ Return on Equity has been maintained over 50% for the last 10 yrs and the management sees no reason for it to go below that.

Strengths

Brand’s Market leadership

Jockey Renewed License for India till 2040

Strong Distribution

Opportunity to gain share after GST

                               10Yr Avg RoE = 50%                          

Co Tapping Into

 Women’s Wear

Leisure Wear

 Expanding Speedo’s Biz

Mgmnt Guidance

Revenue Growth of 20% over next 20 years

Margins Seen B/w 21-22%

ROE to Remain Above 50%

While many argue that Page Industries is expensive at 68X FY20e Earnings, many would say that the company’s brand strength, distribution leadership, historic financial growth, and strong future growth plans justify these valuations. What happens to the stock price is anyone’s guess, but as far as Page Industries business mantra is concerned, I’ll quote Mr. Ashok Genomal, who said to me in an interview not too long ago “Our biggest competition is ourselves”

THE VALUATION PICTURE: PAGE INDUSTRIES

Trades at 68X FY20e