 | |
- close
- close
|
|
Topic
Top news source/blog that we're missing
Why do you recommend this news source?
|
||
WIKI ANALYSIS
Hindustan Unilever Ltd. (Bombay Stock Exchange: 500696) makes fast-moving consumer goods (FMCG) such as detergents, toiletries, and food staples. The company has a distribution channel of 6.3 million outlets and 35 major Indian brands.[1]. HUL recorded 20.02% year over year (yoy) growth in revenue at Rs 16660.38 crores during the year ended Dec'08.[2] Its Soaps and Detergents business was its largest contributor to revenues with 46% of total revenues where as Personal Care products contributed the most (46%) towards EBIT (Earnings before Income Tax).[3]
Raw material prices for palm oil and other chemicals increased of 31% from Nov'07-Apr'08 [4], which led the company to implement a price hike by a weighted average of 10% from April to June 2008 in order to protect its margins.[5] From April to October 2008, however, palm oil prices declined 62.2% so Hindustan has accrued higher revenue on lower volume sales in late 2008, early 2009. [5]
Increase in per capita income in urban, as well as rural areas, of India has a positive effect on demand of consumer goods along with a shift in demand towards high end lifestyle products. Long a provider of low cost consumer goods, HUL has recently launched products in its high end segments.
Company Overview
HUL, the largest FMCG Company in India by revenues was formed by merging three subsidiaries of Unilever in 1956. At present, Unilever Plc holds a 51.6% stake in the company. HUL’s portfolio of products covers a wide spectrum including soaps, detergents, skin creams, shampoos, toothpastes, tea, coffee and branded flour.[6] HUL's brands, spread across 20 distinct consumer categories. It owns 35 major Indian brands. HUL has consistently had the most number of brands in the Top 10 list for the most trusted brands in India from 2003 to 2008.[7] Surf Excel, 'Pepsodent and Ponds in Home and Personal Care segment and Lipton, Kissan and Brooke Bond in Foods and Beverages Segment are some of its top brands. In 2008, it launched Ponds Age Miracle,Vaseline range of products in skin care category and Axe-Dark Temptation in personal care segment as part of their expansion into higher end products.
Business and Financial Metrics
Sales growth of 13.36% in CY'07 ( Calendar Year 2007) and 9.38% in CY'06 can be attributed to aggressive launches, re-launches of products and a hike in product prices.[8] The net Income of the company has not increased at the same pace as revenues because of a decline in margins (from 18.5% in CY'04 to 16.7% in CY'07) [9]in its soaps and detergents business and investment in IT and water purifier business in CY 05-06.[10]
There is an insignificant change in company's revenue mix in CY04-07 period. Soaps and Detergents business contributes highest (46%) towards revenues followed by Personal care products (26%).[3] Despite being highest revenue generator soaps and detergents business is not the most profitable segment. Personal care contributes highest (46.2%)[3] towards the EBIT which is due to high margins and low penetration of the market.
Discussion FY'09[11] (Financial Year 2009) : HUL has shown steady sales growth by 19-20 % in Jan - Sep'08 but it was largely price led due to a hike in product prices in the previous two quarters . Volume growth has decreased from 10.2% in Q1CY08 (1st quarter Calendar Year 2008) to 6.8% in Q3CY08.[4] EBIT margins fell by 30bps to 12.9 due to inflation of Commodities prices but net profit saw a raise to 34% on account of income from sale of properties.[12]
Business Segments
- Soaps and Detergents (46% Revenue, 44% EBIT)[3] : This segment includes Laundry and Personal Wash products like soaps, detergent bars, detergent powders, detergent liquids, scourers,etc.Sales of the segment grew sales by 13.9% and 20.3% in CY07 and H1CY08 respectively. Fabric Wash has shown strong growth in this year with the market share moving up from 34.6% in Q4CY06 to 38.3% in Q2CY08.[13] Profitability margins which declined from 25.7% in CY'02 to 13.7 % in CY'05 due to pricing actions from P&G in the Laundry segment have slightly recovered to 15.6% (CY'07).[1]
- Personal Care Products (26% Revenue, 46.2% EBIT)[3] : This business which comprises mainly skin care, hair care and oral care is the most profitable segment for HUL.It is highest contributor to HUL’s EBIT at 47%. [3] Low penetration and consumption of personal products has sustained these categories' high growth rates. This segment has shown a revenue growth of 20.9% in H1CY08 and the new launches in the Ponds and Dove range contributed to the profitability of the segment.[13]
- Beverages (11% Revenue,10.3% EBIT)[3] : HUL's beverages business is operated through the Brooke Bond and Lipton brands for packet tea and Bru brand for coffee. With the aggressive relaunch of Brooke Bond, Taj Mahal and Taaza, the company has been able to arrest the decline in its market share.Overall margins have declined to 15% in CY'07 from 20% in CY'04 due to hike in Coffee bean prices.[1]
- Foods (4% Revenue, 0.8% EBIT)[3] :In spite of having one of the best distribution networks (coverage of 6.3 mn outlets[1]) in the country, the food business has never constituted a big part of revenues.Thats why this is the current focus area for the company.Presence in the foods category is mainly through soup mix, Chinese meal maker, jams, ketchups and salts. HUL is clearly keeping a low profile in the staples category, which is low margin business.Foods margin dipped partly due to launch related costs for Amaze brain foods (launched in two southern states during the January–March 2008 quarter).[13]
- Ice Cream(1% Revenue, 0.6%EBIT)[3] : This segment includes include Ice Creams and Frozen Desserts.Kwality Wall's, launched in 1995, is the company's master brand for ice cream. It has launched Moo brand that boosts children’s calcium levels in the June quarter of CY07.[13]
- Exports : Exports include sales of Marine Products, Castor, etc. as well as sales of soaps and detergents, personal products, beverages and foods etc. by the Exports Division. Exports are the lowest-margin business for the company. It has already exited the low-margin shrimps and castor business.[3]
- Others: This section includes Chemicals,Water purifiers, Agri seeds, Property Development, Water business, Ayush services etc. It has seen a growth of 41.5% as Pure It (a water purifier product) increased its reach to more than 600 towns.
Trends and Forces
Increasing raw material prices drives HUL to raise its prices
Raw materials constitute a big chunk (63%) of input cost for FMCG sector companies.[14] For HUL- Palm Oil and Chemicals contribute 59% of total raw material cost.[5] Due to inflated input cost in Soap and Detergents division EBITDA(earnings before income tax and depriciation) margins fell from 19.7% in CY03 TO 13.7% in CY07. [5]
The first steep increase in the prices (31% in Nov'07-Apr'08 period) of key raw materials such as palm oil, LAB - Linear Alkyl Benzene, caustic soda, soda ash, raw tea, coffee and crude oil derivatives has led the company to implement price hikes in competitive segments like toothpaste, soaps, detergents and shampoo. The weighted average price increases were 8% in January-March 2008 period and 10% in April-June 2008.[5]
But recently softening Inventories - Raw Materials prices in the last 2-3 months have provided respite to FMCG sector companies. Raw material and packaging materials have fallen sharply from their highs recorded in Sep'08. Palm oil and Brent Crude have fallen by 62.2% and 40.1% from Aril'08 prices.[4] The benefit of fall in raw material prices will be accured later when high cost inventory will be replaced by a cheaper inventory.
Increasing per capita income drives FMCG sector growth
Per capita Income in India has doubled in 4 years 04-07[15]. As their incomes and standards of living improve, Indian customers’ for FMCGs are shifting towards higher lifestyle categories like skin care, hair care, deodorants, convenience foods, health foods etc.
Rural India, where penetration levels are low as compared to urban areas, has a large consuming class with 41 per cent of India's middle-class and 58% of the total disposable income.[16] Factors like loan waiver of farmers, hike in minimum support price for crops and flood inflation has helped farmers with rise in income. The purchasing power in rural areas has increased and spending behavior is also changing which shows a high growth potential for FMCG companies here.
HUL has adapted itself to changing consumer spending patterns. Among many product launches, Dove hair care products, re-launch of Axe deodrants and launch of Ponds Anti Ageing cream are few to be mentioned in high end price spectrum in Personal care. Targeting low income group people, HUL has launched 50 paise[17] shampoo sachets in 2007. Along with these, Company's premium products are now sold thorugh Modern Trade. Also it has entered into a Joint venture with Smollons Holdings of South Africa to increase its capabilities to meet the merchandising demands in Modern Trade.
Per Capita consumption of personal care products in India is one of the lowest among developing economies of the world.
India has one of the lowest levels in per capita consumption of consumer goods among developing economies of the world. It has per capita consumtion levels of 1.4,0.3,0.2 and 0.3 US$ in detergents, shampoo, ice-creams and skin care segments respectively which are lower than that of China, Brazil and Indonesia. Consumption levels in the U.S., a developed country, are 16.6, 6.7, 49.4 and 36.6 in categories mentioned before. Low consumption coupled with increase in per capita income poses as a growth opportunity for consumer products companies.
| ' | Detergents | Shampoo | Skin Care | Ice-cream |
| Brazil | 12.1 | 6.0 | 12.2 | 5.9 |
| China | 2.2 | 1.0 | 3.2 | 3.0 |
| Indonesia | 1.9 | 1.0 | 0.8 | 1.0 |
| India | 1.4 | 0.3 | 0.3 | 0.2 |
Highly Competitive FMCG Sector limits profit margins of HUL.
In a volume driven and competitively intense environment with competition also from local players FMCG players are aggressively promoting their brands to gain product awareness, customer base, and their shares of the customers’ wallets. To facilitate launch new products and relaunch of existing products companies are increasing their research and development expenditure. These factors eat up the profitability margins of the companies.
HUL has consistently been the top advertisement spender over the years with expenditure of Rs 650 crore in the year 2008.[19] Second largest spending is Rs 240 crore by a telecom company. P&G India and Colgate-Plamolive, other FMCG players, also feature in the top 10 advertisers list.[19] HUL has increased its advertising expenses by 26.56% in CY'07.[3] Also the money spent in Research and Development which facilitates new product launches and re-launches of existing products has seen a raise by 38.16% in the same year.[3]
Pricing scenario in current time is in favor of companies but in past due to pricing war with P&G in Soaps and Detergents, HUL's magins in the segment declined from a high of 25.7% in CY02 to 13.7% in CY05.[1]
Competition
The Indian FMCG sector is the fourth largest sector in the economy with a total market size of US$18 billion as of 2007.As the name suggests FMCG products are frequently used and bought by the customers so there are large number of players supplying same products. HUL is the only company in Indian consumer goods market that has products in more segments than any other company of the same sector.HUL is the largest FMCG company in terms of revenues.
Procter and Gamble (P&G) India : HUL faces a fierce competition from P&G India in its key segments i.e. Detergents and Personal Care. It operates in India thorugh three subsidiaries: Procter and Gamble Home Products (100% subsidiary of the company), Procter and Gamble Hygiene and Health care Ltd. (PGHH) and Gillette India Ltd. It has in its portfolio some of P&G's Billion dollar brands such as Vicks & Whisper in health care and Ariel and Tide in detergents segments.[20]
Godrej Consumer Products Ltd. (GCPL): It has two segments: Soap (64% of revenues) and Personal Care.GCPL is second largest soap player in India after HUL with a market share of 9.2%. [5]Personal Care includes hair care products, shaving cream and other toiletries.On December 11, 2008, it acquired 100% stake in SCA Hygiene Products which owns the Snuggy brand of baby diapers.[21]
Dabur India Limited - Dabur India Limited is an India-based fast moving consumer goods company which deals in healthcare, personal care and food products.In November 2008, Dabur India Limited announced the acquisition of 72.15% of Fem Care Pharma Ltd which is primarily engaged in the business of export of personal care products. [22]
Colgate-Palmolive (India) Limited : It manufactures a range of products marketed under the Colgate which includes oral care products and Palmolive (skin care and hair care products) brand names.[23]
Marico Limited:Marico has a portfolio on high margin "Beauty and Wellness" platform which includes hair oils, soaps, edible oils, skin care etc. This portfolio has shown a growth of 30% over a period of FY05-08. [5]
| ' | Net Sales | Net Profit | Operating Profit Margin | |||||
| (in Rs. Crore)[24] | Growth (%) | (in Rs. Crore.) | Growth (%) | (%) | (%) | |||
| FY'08 | FY'08 | FY'07 | FY'08 | FY'08 | FY'07 | FY'08 | FY'07 | |
| HUL[25] | 13880.56 | 13.36 | 9.38 | 1769.06 | -4.65 | 31.76 | 14.95 | 14.74 |
| GCPL[26] | 891.92 | 17.22 | 16.05 | 148.12 | 21.37 | 0.68 | 22.27 | 20 |
| Dabur[27] | 2093.63 | 19.9 | 29.7 | 316.77 | 25.66 | 33.3 | 18.59 | 17.45 |
| Colgate[28] | 1518.88 | 14.03 | 16.02 | 231.71 | 44.66 | 16.4 | 18.09 | 18.79 |
| Marico[29] | 1575.99 | 14.76 | 31.39 | 143.41 | 23.45 | 17.47 | 13.29 | 13.77 |
| PGHH (P&G)[30] | 643.95 | 18.54 | -4.98 | 131.42 | 46.3 | -35.6 | 27.75 | 24.14 |
Market Share
HUL has a dominant market share across different segments in FMCG sector. HUL has been able to sustain highest sales revenues in the sector through its products across all the price points (entry level, mid and top end of market), better brand positioning, aggressive brand management and restructuring of product portfolios. But over the long term (Dec'02 - Sep'08), company has lost considerable share in some categories.The loss can be attributed to the fact that HUL has its products across all segments of FMCG sector but its competitors are focussing on niche products.
In Q3CY08,HUL has seen a market share loss in most of the categories barring detergents, tea and coffee. Part of the market share loss is attributable to changing market structure i.e. top end growing at a faster pace, where HUL does not have a market share similar to what it has at the mass segment.
| Dec'02 | Dec'05 | Dec'07 | Mar'08 | Jun'08 | Sep'08[32] | |
| Laundry | 41.9 | 38 | 37.5 | 37.9 | 38.3 | 37.9 |
| Personal Wash | 59.8 | 54.9 | 54.3 | 54.3 | 52.7 | 50.3 |
| Hair | 58 | 48.2 | 47.8 | 46.3 | 46.5 | 46.1 |
| Oral | 33.4 | 31.9 | 29.5 | 29.8 | 30 | 29.6 |
| Tea | 32 | 30.9 | 22.7 | 22.9 | 23.2 | 23.3 |
| Coffee | 43.1 | 40.3 | 44.5 | 43.6 | 46.9 | 47.1 |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 J.M.Financial '08
- ↑ MoneyControl.com : HUL
- ↑ 3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 HUL Annual Report'07
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 Emkay Research Report Dec'08
- ↑ Company Website
- ↑ Economic Time Jun 11 2008
- ↑ India Infoline Analysis report May'08
- ↑ INBICS REPORT
- ↑ Credit Suisse report 2007
- ↑ till 3rd quarter
- ↑ Hindustan Unilever Q3 net up 34 pct
- ↑ 13.0 13.1 13.2 13.3 HDFC Securities Report Sep'08
- ↑ Balance Sheet - 2007
- ↑ HUL Company Presentation'08
- ↑ INBICS FMCG Sector Report
- ↑ 1 indian rupee (INR) = 100 paise
- ↑ Credit Suisse Dec'07
- ↑ 19.0 19.1 Economic Times 26 Jan 2009
- ↑ P&G India website
- ↑ Google Finance: Godrej Consumer Products Ltd.
- ↑ Google Finance : Dabur India Limited.
- ↑ Google Finance: Colagate-Palmolive (India) Ltd.
- ↑ 1 crore = 10 million
- ↑ For HUL the figures are for CY'07 and CY'06 instead of FY'08 and FY'07
- ↑ Company Website: GCPL
- ↑ Company Website: Dabur
- ↑ Company Website : Colgate Plamolive(India) Ltd.
- ↑ Company Website: Marico
- ↑ PGHH is P&G Health and Hygiene care Ltd. It publishes its annual results in quarter ending Jun of every month.
- ↑ Company Presentation'08
- ↑ Indiabulls Research Report Dec'08
| ||||||
|
|
