Big is beautiful

POUND WISE

2013   311Affluent 46124Aspiring 13196Striving  Aggressive moves
The company has forayed into new categories like water, besides launching new products that fall in the mid-to-premium end of the market, in both new as well as existing businesses.  In the water business, over a year ago, HUL launched a water purification product under Pureit brand, which currently sells at about Rs 1,800 a piece with the recurring cost being Rs 300 for the replaceable battery kit that lasts for about 1,500 litres.  While this product is now available across 19 states across 170 towns, it covers only 4.5 million households, thus indicating the huge potential.  Among the most recent launches include Kissan Amaze brainfood targeted at school children. In February 2008, Kissan Amaze brainfood was launched in different formats like bars, bites and milk mixes, and in various flavours. This product is currently being test marketed in Tamil Nadu and Karnataka and, should see a gradual roll-out across the country.  Likewise, in the December 2007 quarter, HUL launched a premium tea range (desert teas) under the Taj Mahal brand. It also launched Unilever's international olive oil brand "Bertolli".  The last 12 months have also seen new product (mid-to-top range) launches in the personal care business, under the Dove and Ponds brands. The other businesses like foods have also seen new variants like Kissan Chatakdar ketchup being launched.  While the company is well established with dominant market share in most of its businesses and across market segments (mass, middle and premium), its aggression in launching products in the middle-to-premium categories is positive.  It will help the company capture the potential market arising from the growing needs of the fast-expanding market, especially the aspiring and affluent Indian household categories.  These launches should also insulate the company from potential price wars that are typical in the price-sensitive mass-market segments.  Long-term drivers
Simultaneously, growth opportunity in the rural markets, which is estimated to account for a big chunk of HUL's revenues, is also expected to remain robust. Higher farm output as well as firm agri prices suggest that rural incomes should remain robust, leading to increased consumption.  A HUL spokesperson says, "A good farm output is positive for the FMCG industry. Penetration and consumption levels are also low in rural India."  And for HUL, which has one of the most extensive distribution networks (reach) in India and a large product portfolio spanning across price categories, it should emerge as the biggest beneficiaries.  In the long-term, too, there is potential to sustain healthy growth. To give some numbers, even as toothpaste penetration in rural India is under 40 per cent (for all India, it is 49 per cent), it is just 18 per cent in skin creams (22 per cent for all India) and 32 per cent in shampoos (38 per cent for all India).  Now consider this, in skin care, HUL has a 54.5 per cent market share. With the per capita expenditure just 1/25th that of Thailand, there is tremendous scope for many players to exist and grow the market thus, indicating phenomenal growth for companies like HUL.  Q1 2008: Robust show
The company's performance for the first quarter ended March 2008 only confirms that the growth story has gained further traction.  The largest contributor to its sales, the soaps and detergent business (45 per cent of sales), once labelled as a mature category, too, has seen its sales grow year-on-year (yoy) by almost 20 per cent and segment profits by 34.3 per cent. In personal care, sales and profits grew by about 24 per cent each.  Although total sales grew by 19.8 per cent during the quarter, with a part of the increase on account of price hikes (due to rise in input costs), the positive aspect is that sales volumes expanded by 10.2 per cent.  Additionally, EBIDTA growth was higher at 21.7 per cent thanks to a combination of factors like cost savings, improvement in efficiencies and product mix and price hikes. 
 

HEALTHY GROWTH
Rs crore	CY07	CY08E	CY09E
Net sales	13,718	15,910	18,200
EBIDTA	1,885	2,257	2,650
Net profit*	1,769	2,088	2,439
EPS (Rs)*	8.10	9.60	11.40
PE (x)	29.28	24.70	20.80
E: Estimates                  *excluding extra-ordinary items

 Investment rationale
The days of unexciting growth and restructuring (exit from non-core businesses, rationalisation of brand portfolio) are behind, and HUL is expected to sustain healthy growth across its businesses led by innovation, product launches, improving demographics, foray into new business segments and notably, strong demand in rural and urban markets.  Apart from cost pressures in the form of higher input costs, companies also face competition. For HUL, new competition, including in the form of ITC in the soaps and shampoo business, has been rising.  However, history suggests that HUL is capable of handling cost as well as competitive pressures, and has the tendency to bounce back in a stronger form, which provides confidence.  Going forward, analysts expect HUL's sales to grow by 15 per cent and profits between 18-20 per cent over the next two years. At Rs 237.15, the stock trades at a PE of 21.2 times it's estimated 2009 earnings, and can deliver over 20 per cent returns in the next one year.