INSTITUTIONAL EQUITY RESEARCH Hindustan Unilever Ltd (HUVR IN) “Golden Goose” – one should not let it go 23 September 2019 INDIA | FMCG | Company Update We have received an overwhelming response for our India Detergent: Goldilocking BUY (Maintain) premiumization report from the managements of leading FMCG companies, consultants / ex- CMP RS 1,970 employees who belong to the consumer sector, and most importantly, from you, our clients. TARGET RS 2,330 (18%) Thank you so much for acknowledging our effort! Your appreciation will motivate our young consumer team to work even harder and write more ground-level insight-driven research COMPANY DATA reports. O/S SHARES (MN) : 2165 MARKET CAP (RSBN) : 3951 What has happened in the detergents segment after our report? MARKET CAP (USDBN) : 55.6 (1) Focus on liquid detergent portfolio continues to remain unabated 52 - WK HI/LO (RS) : 1889 / 1478 ● HUL has brought its third detergent brand Sunlight under the liquid detergent format LIQUIDITY 3M (USDMN) : 33.7 and launched it in its strongholds of Kerala and West Bengal. PAR VALUE (RS) : 1 ● Reckitt Benckiser (RB) has decided that it also wants to cash in on the premiumization SHARE HOLDING PATTERN, % bandwagon in detergents. It has forayed into the premium liquid detergent category Jun 19 Mar 19 Dec 18 through its brand Woolite. It has also recently re-launched its stain-removal brand Vanish PROMOTERS : 67.2 67.2 67.2 and made it available in a Rs 15 sachet format. FII / NRI : 11.9 12.0 12.1 ● GCPL has renewed its aggression in its liquid detergent portfolio (Genteel and Ezee brands). FI / MF : 7.0 7.4 7.3 (2) Incumbents have taken up the mantle of premiumization NON PRO : 1.1 1.0 1.0 PUBLIC & OTHERS : 12.9 12.4 12.4 ● P&G launched a matic detergent for its Tide brand called Tide Ultra; it did not have a product in the mid-end matic detergent segment that could compete with HUL. PRICE PERFORMANCE, % ● HUL introduced its fifth detergent brand Love & Care, positioned at the super-premium 1MTH 3MTH 1YR consumer, with more focus on ‘fabric care’. These products are priced at a 40-65% ABS -0.9 1.1 10.7 REL TO BSE 2.2 9.7 13.2 premium to the existing liquid detergent portfolio. (3) Retailers also don’t want to miss the bus KEY FINANCIALS ● Future Consumer has decided to make a foray into the liquid detergents market through Rs mn FY20E FY21E FY22E self-incubated brand Voom; however, its reach is restricted to Future Group outlets – Big Net Sales 4,01,361 5,04,135 5,61,617 Bazaar, Easy Day, and Nilgiri. EBIDTA 97,871 1,27,982 1,45,119 ● D-Mart has extended its private label in the detergents space (Starlight brand) to many Net Profit 71,173 95,644 1,09,216 more of its own outlets. EPS, Rs 33.0 40.8 46.6 (4) Low-unit packs continue to drive penetration towards premium products: Surf Excel’s PER, x 59.8 48.3 42.3 EV/EBIDTA, x 42.6 34.8 30.6 Rs 10 pack has been at the forefront of driving a shift for this brand towards P/BV, x 51.4 11.2 10.9 premiumization. Taking a leaf from HUL’s strategy, Jyothy Labs has upped its ante on ROE, % 86.0 23.2 25.8 LUPs (low-unit packs) for its Henko brand. This brand hadn’t been able to make much headway in larger packs (despite superior product formulation) due to the presence of PRICE VS. SENSEX strong incumbents in general trade (GT). LUPs have started delivering results and 230 contribute to more than 20% of Henko’s sales now – they have also enabled the brand 200 to make inroads into GT, which was otherwise proving difficult with large packs. (5) We visited HUL newly commenced Suvidha Centre (Laundromat) in Malad, Mumbai, 170 thereby balancing and achieving its CSR and premiumization objectives smartly 140 HUL is the Golden Goose; a bellwether in challenging times: We believe that investors 110 should stay with the stock, even if its near-term stock performance remains subdued 80 because of – (1) weak volume growth till 3QFY20; economic recovery is likely only towards Apr-16 Jan-17 Oct-17 Jul-18 Apr-19 the end of FY20, and (2) a high likelihood of GSK Plc. offloading its 5.3% stake after its HUL BSE Sensex merger with HUL (likely in 3QFY20) as it has to make payments for its Novartis JV acquisition. Source: Phillip Capital India Research In our view, HUL has all the right ingredients – (1) management focus on premiumization, (2) strengthening core categories, (3) focus on improving distribution productivity using digital Vishal Gutka, Research Analyst (+ 9122 6246 4118) [email protected] means, and (4) foray into under-penetrated fast-growing categories to sustain mid to high- single-digit volume growth in the medium term. The GSK Consumer acquisition is a step in Preeyam Tolia, Research Associate the right direction. We have increased our EPS estimates for FY20-22e by 4-6% to account (+ 9122 6246 4129) [email protected] for 1) recent tax changes and 2) better competitive positioning vs peers who are paying lower taxes in key competing categories and maintain our high-conviction BUY with a target of Rs 2,330 (50x FY22 EPS). Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer. HINDUSTAN UNILEVER LTD COMPANY UPDATE CPG companies are focusing on liquid portfolios. WHY? CPG companies have started to realize there is a “Right to Win” in their liquid detergent portfolios, which may not be easily available for powders and bars. Consumers are showing an increased tendency towards adopting liquids after understanding its benefits over other formats. These include better wash quality and them being less harmful to washing machines, since they do not leave residues. Liquids have a ‘Right to Win’ due to following factors ● Manufacturing of Liquids involves some amount of science/ technology. As they are in the concentrated format, all their ingredients have to be settled properly – not an easy process to achieve. ● Products can be differentiated vs. competition: CPG companies can create lots of differentiation via adding fragrance, softeners, and additives that help in retaining colour and design of the fabric – this is difficult to achieve in commoditized segments of bars and powders. ● Capex requirements for setting up a liquid plant are far higher than setting up a detergent powder plant, thereby limiting the number of manufacturers. Margin analysis brand-wise Segment Popular Mid-end Premium Super-premium Brands Wheel Rin Easy wash Quick wash Top load Front load Top load Front load Price Per Kg 53 77 118 118 180 225 209 235 COGS 40 50 58 65 90 105 105 115 Gross Profit 13 27 60 53 90 120 104 120 % margin 25% 35% 51% 45% 50% 53% 50% 51% % Contribution to HUL detergent sales 33% 23% 42% 2% Blended Detergent Gross margin 39% Source: PhillipCapital India estimates HUL has kept prices of matic powder and liquid portfolio at similar levels, despite the latter being a more superior and premium product. This is because the company wants more customers to switch from matic or normal detergent powders to liquids – given its Right to Win. HUL will leave no stone unturned to make its liquid portfolio a ‘meaningful one’ HUL will try its utmost to ensure that its liquid portfolio becomes meaningful from current levels of Rs 2.0-2.5bn. The liquid detergent segment, at the industry level, has been growing 2-3x of regular detergents. In order to achieve its objective, HUL has brought Sunlight brand under the liquid detergent format, which has a strong brand equity in the Kerala and West Bengal market. HUL’s Liquid detergent portfolio Rin** Sunlight** Surf Excel Easy Wash** Surf Excel - Top Load Surf Excel - Front Load Rs/litre 151 151 150 209 235 **These liquid detergents can be used for machines as well as for bucket wash Source: Bigbasket, PhillipCapital India Hindustan Foods, one of the largest contract manufacturers for HUL in the detergent space, has set up a separate liquid detergent facility in Hyderabad with a capex of Rs 1.5bn, which it expects to commission in 3QFY20. Our checks with experts suggest that such type of plants would have an asset turnover of at least 5-6x when they are run at optimum levels. Reckitt Benckiser trying to wedge a foot in the door Reckitt Benckiser has achieved significant success over the past few years in its Harpic (toiler cleaner), Dettol (soap) and Lizol (floor cleaner) helped by the government blitzkrieg campaign of Swachh Bharat and its own efforts towards improving its value proposition. Reckitt has also decided to step on its laundry segment offerings by Page | 2 | PHILLIPCAPITAL INDIA RESEARCH HINDUSTAN UNILEVER LTD COMPANY UPDATE entering the super-premium liquid detergent market through the “Woolite” brand. As of now, the product will be imported and mainly sold through the e-commerce channel. Comparing Woolite with HUL’s major brand Company Rs / lt Description Woolite Darks RB 375 Protects dark clothes from fading and repairs damaged fibres, works with all fabrics including wool, silk, and satin.