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Following its global peer GlaxoSmithKline, fast-moving consumer goods (FMCG) major Unilever on Tuesday announced a voluntary open offer to increase its stake in its Indian subsidiary Hindustan Unilever Limited (HUL) at Rs 600 a share. The announcement led to the HUL stock surging 20 per cent, before ending at Rs 583.6 on BSE, a rise of 17.3 per cent over the previous close.
While the offer price appears to be reasonable, analysts believe long-term investors should hold on to the HUL stock, considering the strong business prospects. V Srinivasan, FMCG research analyst, Angel Broking, says, “The open offer is good for the company and the price is reasonable for investors. The decision indicates confidence the promoter group has on Indian markets. We continue to remain neutral on the stock after this announcement and believe long-term investors should stay invested in the stock.”
However, if one were to compare HUL’s share price in October 2012, when it had touched an all-time closing high of Rs 578, the offer price isn’t attractive. Though the stock fell to Rs 433 in early March this year, owing to concerns on the high royalty outgo to Unilever, it regained some of the lost ground. Yesterday, it jumped seven per cent to Rs 497 on better-than-expected results for the quarter ended March. In the last two years, HUL’s earnings have seen strong growth, leading to 20-40 per cent returns for shareholders.
Even as consumption in India remains under pressure, analysts estimate the company’s earnings to rise 12-15 per cent during FY13-15. In a conducive environment, the growth is likely to be better.
“We remain positive on HUL and expect it to record six to eight per cent volume growth in the coming quarters. The parent company is very bullish on India and will not de-list in India. The open offer should allay royalty concerns as now, the company will launch more products. We think long-term investors should wait and not tender their shares in the open offer,” said Abneesh Roy, FMCG analyst at Edelweiss Securities.
Unilever’s open offer signifies India’s growing importance for the FMCG major and reflects the promoters’ confidence in the country’s consumption growth story. HUL is investing in ‘segments of the future’ such as liquid hand/body wash and fabric conditioners to tap into the new and potentially huge growth opportunities in India. In sync with the macro economy, HUL witnessed low volume growth in FY13. However, it expects demand to pick up over the medium term. Higher investment by Unilever could enable HUL to tap into the parent’s rich technology and launch new products in India.
Saurabh Mukherjea, head of equities, Ambit Capital, says, “I think the MNC parent’s decision to invest heavily in companies such as HUL and GSK Consumer is a long-term positive for the companies. Investors who have the patience to wait for three to four years should stay invested in the scrip. Higher stake would mean fresh investments, more products and world-class offerings for HUL, which may take a couple of years to penetrate the Indian markets.”
Though the offer price appears to be reasonable from a short-term perspective, investors planning to tender their shares would be subject to capital gains tax. Thus, after the rally in the share price, selling shares in the market could be more tax-efficient for those looking to sell. “The offer has boosted the stock and short-term investors could make quick returns on the HUL scrip by selling the stock at prices close to the open offer price, without the tax burden,” said Mukherjea.
According to Indian laws, a listed company should have public shareholding of at least 25 per cent. Most analysts rule out the possibility of HUL being de-listed after the open offer. “Open offer subscription would decide on de-listing, though de-listing does not appear to be the parent’s intent right now. Further, given the offer is unlikely to be fully subscribed (as people with a long-term view stay invested in the company), de-listing appears to be a distant possibility,” says Srinivasan. Nonetheless, even for de-listing, the parent would have to provide an exit opportunity to existing investors, probably at a much higher price.
