‘Hindustan Unilever’s offer to pay tax benefit amount back to the government was unprecedented’

Update on the Indian Equity Market:

On Monday, Nifty closed 0.1% higher at 12,261. Among the stocks, Tata Motors (+4.3%), Eicher Motors (+2.6%) and UPL (+1.8%) were the gainers. Yes Bank (-1.2%), ICICI Bank (-0.9%), and SBI (-0.8%) ended in the red. Auto (+1.5%), Metal (+1.2%) and Media (+0.7%) were the top sectoral gainers. PSU Banks (-1.2%) was the top loser.

Excerpts from an interview with Mr Sudhir Sitapati, Executive Director:Foods & Refreshment, Hindustan Unilever Ltd

  • HUL has been around for 100 years and there have been major ups and downs. So regardless of what the situation is emerging, every year is different in India. It is not unique to this year or last year. Every year has its challenges, but HUL has always got some trick up its sleeves somewhere to compete in the market.
  • Taxes on a lot of products were reduced with GST but they were not able to implement the price reductions on the day on which the taxes were reduced because they had stocks in the factory, in the warehouse and they, cannot be transporting stocks all over this country.
  • What HUL did was it calculated the tax benefit that it would get that it could not pass on to the consumers and voluntarily Sanjiv Mehta, chairman, offered to pay that amount to the government.
  • It was meant to be passed on to the consumers. As they couldn’t pass it on to the consumers and what they couldn’t pass on doesn’t belong to them is what they thought and it goes back to the government.
  • Through the history of HUL, it has balanced between top-line growth and bottom-line growth depending on the circumstance.
  • HUL is famous for being a marketing powerhouse. What is less known about HUL is that it’s a cost powerhouse. As long as there is cost, it’s their job to go after it. Margins are a consequence of that.
  • The company’s philosophy has been to chase consumer value and to do it in the most efficient manner and they reckon that fixed costs are roughly half the cost and half the costs are variable. So the more you grow volumes the more your margins expand.
  • The fundamental reason for GSK consumer acquisition is different. The real reason is that the HFD category’s penetration is 25% if we take the weighted average penetration of HUL today and it goes back to the question on what the mix of growth for HUL is. Sometimes it has been top line, sometimes it has been bottom-line. If we take categories and their penetration on one side and the growth on the other, the general rule of thumb in consumer goods marketing is that the lower the penetration, the faster the growth.
  • In the ’90s when their personal products were the engine of growth, they were all 25-sub 30% penetration. Now all those categories are 80-90% penetration. So the primary thing that GSK does is it takes down the weighted penetration.
  • It is not about getting extra distribution, it is not about the cost-saving. All that will happen. It is about the fact that the weighted average penetration of HUL will come down with such a large category. That is the real reason for GSK acquisition.
  • HUL has been doing extremely well for the last decade at least and the milestones or the goals that they have continued to remain the same. They continue to grow fast, markets have ups and downs. This is not the first down or up they have seen in the market. So life is normal for them.

Consensus Estimate: (Source: market screener, website)

  • The closing price of HUL was ₹ 1,939 /- as of 30th December 19. It traded at 58x/ 49x/ 42x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 33.2/39.7/46.0 respectively.
  • Consensus target price of ₹ 2,137/- implies a PE multiple of 46x on FY22E EPS of ₹ 46.0/-.