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Home Hindustan Unilever – Stock of the Month (January 2016)

Hindustan Unilever – Stock of the Month (January 2016)

18 January, 2016

Price: Rs. 810.60

Hindustan Unilever Limited (“HUL” or the “Company”) has its presence in five segments.

  • Soaps and Detergents segments comprises categories of Soaps, Detergents and Household Care,

  • Personal Products segment includes categories of Skin Care, Hair Care, Oral Care, Colour Cosmetics and Deodorants.

  • Beverages segment covers Tea and Coffee.

  • Packaged foods segment includes Culinary and Bakery Products, Frozen Desserts and Ice cream.

  • Others include Water business (Pureit).

Hindustan Unilever

The Company has maintained an average dividend yield of 1.75 % over the last 5 financial years.

Liquidity and Credit Analysis

HUL’s average current ratio over the last 5 financial years has been 1.09 times which indicates that the Company is comfortably placed to pay for its short term obligations.

HUL’s average long term debt equity ratio over the 5 financial years has been 0.00 times which indicates that the Company operates with close to zero debt and is placed well to withstand economic slowdowns.

HUL’s average interest coverage ratio over the last 5 financial years has been 1,080.90 times this indicates that the Company can meet its debt obligations without any difficulty.

INVESTMENT RATIONALE

Diversified Brand Portfolio

Soaps

Dove, Lifebuoy, Lux and Liril, Vim

Detergents

Surf, Comfort, Wheel, Rin

Skin Care

Fair & Lovely, Pond, Lakme, Dove

Hair Care

Dove, TRESemme, Clinic Plus, Sunsilk, Toni&Guy

Oral Care

Closeup, Pepsodent

Deodorant

Axe, Dove

Tea

Taj Mahal, Red Label, 3 Roses

Coffee

Bru

Packaged Food

Knorr, Annapurna, Modern, Kissan, Kwality Walls and Magnum

Water

Pureit

Hindustan UnileverDominant Position in Soaps & Detergents

Soaps & detergents segment contributes ~48% to the overall revenue. The Company’s strong brands in soaps (Lifebuoy, Lux, Liril, Rexona) and detergents (Wheel, Surf Excel, Surf, Vim) have helped the company maintain its dominant position in both segments (~40% in detergents and ~45% in soaps) over the years, despite intense competition. Hindustan Unilever is continuously investing in maintaining its market share by launching the liquid format of soaps, viz. hand wash and body wash.

Strong Brand Portfolio in Personal Care Products

The Company has strong brand portfolio and presence across all categories of personal care segments (hair care, oral care, skin care, men’s grooming, and cosmetics). Personal care segment contributes ~47% to EBIT. Hindustan Unilever brands caters to all segment of consumers –

Premium – Pond’s, Axe, Dove, Close Up;

Popular – Vaseline, Sunsilk, Pepsodent;

Mass – Fair & Lovely, Clinic Plus.

Premiumisation – Revenue Driver for Beverages

Hindustan Unilever is the second largest branded tea company in India with brands like Lipton, Taj Mahal, and Red Label. The Company is also growing in the branded coffee business with its brand ‘Bru’. Growing green tea and coffee culture in the country and shift of consumers to premium flavored teas and tea bags are expected to generate steady revenue for company’s beverages portfolio.

Entry into Ayurveda Play – Indulekha

HUL has bought hair care brand Indulekha from Kerala-based Mosons Group for ₹ 330 Cr. to have its presence in the growing ayurvedic segment. The acquisition ofIndulekha brings to HUL a premium brand around ayurveda that will complement its existing portfolio and strengthen its presence in the hair-care category.

Several local players such as Dabur, Emami, Himalaya, Ayushakti, Kama Ayurvedic and Baba Ramdev’s Patanjali have already entered this segment as consumers are opting out of chemical-based products in the personal care segment.

INVESTMENT CONCERNS

Struggling Oral Care Segment

HUL is struggling to increase its market share in the oral care business which faces high competition from players like Colgate, Dabur India and Procter & Gamble. In FY 2015, HUL lost its market share, with Dabur eating into its share and Colgate consolidating its leadership position.

Note – Colgate-Palmolive gained market share in 2015 at 56.7 % as against 55.9 % in 2014, Dabur also gained market share in 2015 to 13.4 % from 12 % in the previous year while HUL’s market  share declined to 21.5 % from 22.8 % in 2014.

Loss Making Water Purifier Business

In India, a very small percentage of population uses water purifiers. Hindustan Unilever therefore has to first educate the consumers, getting them to appreciate the benefits of safe water, and then adopting Pureit. Hindustan Unilever faces huge competition from various water purifier providers like Aquaguard, Kent, Tata Swach. The Company reported a loss in this segment in FY 2015.

High pricing in the range of Rs. 1500 to Rs. 21990, also make the product less affordable for major section of the society.

Counterfeit Consumer Goods

According to KPMG Report – Sell Smart, July 2015 – fake consumer goods are growing faster than the overall consumer products market. Counterfeit and smuggled products now account for more than a fifth of the FMCG market in India.

Lack of awareness among consumers and incapability to differentiate between genuine and fake goods act as a major risk for the FMCG companies.

Threat of New Entrants

Over the last decade, the Indian FMCG industry has been dominated by few established players such as Colgate, Britannia, Procter & Gamble (P&G), Marico and Dabur. In the FMCG space there is always a threat of a new entrant who may want to expand their portfolio of offerings.