With a legacy of over 80 years, Hindustan Unilever Limited (HUL) is India’s biggest fast-moving consumer goods company. Actually, the very first product of the company was launched in 1888 named Sunlight Soap. In 1931 Unilever set up its subsidiary in India and in 1956, its subsidiaries consolidated to form Hindustan Leer Limited.
In 2007, the name was renamed Hindustan Unilever Limited. In 2013, the parent company Unilever increased the market stake in HUL to 67% and in 2018, the market cap of HUL passed $50bn.
HUL primarily has three divisions:
- Home Care
- Beauty and Personal Care
- Food and Refreshment
Hindustan Unilever has a pan India access and it is found that more than 9 out of 10 households in India use a brand of HUL. Currently, the company has 14 brands in 44 different categories including Skin Cleansing, Tea, Deodrants, HFD, etc. Famous Brands like Surf Excel, Rin, Wheel, Vaseline, Pepsodent, and Clinic Plus are included in the portfolio of the company.
On April 1, 2020, HUL also acquired leading brands like Horlicks and Boost. The company has 21,000 employees working under it with 31 factories, and more than 1150 suppliers and the products are available at more than 8million outlets in India.
HUL Case Study – Industry Analysis
FMCG sector is the fourth largest sector in India, which has surged from 840 Billion USD in 2017 to 1.1 Trillion USD in FY20 and is expected to grow at 10% a year. Personal Care and Household dominate with 50% of FMCG sales in India. Rapid urbanization, increasing disposable incomes, and better lifestyles have been the main growth drivers for the FMCG sector.
55% of the sales come from the urban segment, however, for the last few years, it has witnessed faster growth in the rural segment as compared to the urban segment. In rural India, the sector grew at 10.6% in the Q3 FY20, majorly due to better agricultural output.
It is expected that the rural FMCG market will rise to USD 220 billion by the end of 2025, at the same time, the market share of the unorganized market is expected to fall rapidly.
Michael Porter’s 5 Force Analysis of HUL
1. Rivalry Amongst Competitors
- FMCG industry is a very competitive one with many brands available, and new products coming in each quarter make innovation very important. FMCG business is highly dependent on advertisement and companies spent a big percentage on it.
- The switching costs for the customers are very low in this sector as the product differentiation is moderately low, which intensifies the competition.
2. A Threat by Substitutes
- Substitute in the FMCG sector is highly dependent on the particular product. For example, it is way easier to find Colgate toothpaste at a local shop than a homemade organic dentifrice. On the other hand, the substitute product for biscuits is rusk which is easily available. Since switching costs are very less, the threat of substitutes is relatively on the higher side.
3. Barriers to Entry
- Barriers to entry in the FMCG sector are far less as compared to the others. FMCG business is majorly dependent on brand identification and this can be developed with unique qualities, logo, advertisement; basically, proper market strategy.
- The distribution network is very large and branched in the FMCG sector, which further eases barriers to entry.
4. Bargaining Power of Suppliers
- In the FMCG business, companies have long-term business with the suppliers, which helps them to negotiate the price. Moreover, the number of suppliers is ample; hence, decreasing the bargaining power of suppliers. However, companies need to make sure that they are getting the supplies at the cheapest possible prices as the industry is a high-volume, low-margin business.
5. Bargaining Power of Customers
- Factors like a high number of similar product companies available, very low switching costs, and similar products available at similar quality and in almost the same price range increase the bargaining power of customers. The only thing that can make them stay is brand loyalty for a product.
HUL Case Study – SWOT Analysis
Now, moving forward in our HUL case study, we will perform the SWOT analysis.
- HUL has a strong brand equity and a large legacy as it is a very old and well-rooted company with a variety of popular brands and products.
- The company has its presence across the length and breadth of India with over 8 million+ retail stores where its products are available.
- HUL runs in a very competitive environment and there are highly established and rising companies that are little product-focused and hence, eat up the market share of the company.
- HUL currently doesn’t have any ayurvedic or natural products in their portfolio, which is a negative aspect of the company as the current population’s trend is shifting to herbal products and many focused companies are making the best use of it.
- With increasing disposable incomes, education and youth population, the FMCG sector in rural and semi-urban areas is expected to grow very rapidly as compared to urban areas. The company can use this very well as it already has a brand image and a wide chain of distributors.
- The company can use its healthy cash reserve position and brand image legacy to acquire various products to diversify its portfolio.
- HUL runs in a highly competitive environment, with 100% FDI allowed by the Govt. of India and new multinational companies setting their feet, the company faces a high threat from its competitors.
- The company is highly dependent on raw material prices. Inflation can shrink the margins for the company as it runs in a sector that is a high-volume, low-margin one.
- Population’s shift to organic and healthy products can help some unorganized and small companies to increase their market share, which can be a threat to HUL.
There are 9 members in the board of directors committee of the company, out of which 6 are Independent Directors including one female member.
Mr. Sanjiv Mehta has been serving as the Chairman and Managing Director of the company since 2018. Chartered Accountant by degree, Sanjiv Mehta is also the President of Unilever South Asia (Pakistan, Bangladesh, Sri Lanka, and Nepal). In 2019, he was awarded the “Business Leader of The Year” award by the All India Management Association.
Mr. Willem Uijen is the Executive Director, Supply Chain of Hindustan Unilever Limited. He has been with the company since 1999 and was a part of various demographical projects of the company, especially in Latin America. In January 2020, he joined his current position.
Financial Analysis of HUL
- 44% of the company’s revenue comes from Beauty and Personal Care, followed by Home Care (34%). Foods & Refreshment contributes 19% and only 3% comes from others.
- In terms of Operating profit, Beauty and Personal care products contribute the maximum (55%), 29% comes from Home Care, 14% and 3% from Foods and others respectively.
- The company has a 54% market share in the Skin Care Segment, which makes it the market leader. In Dishwashing Detergents, 55% of the market share is dominated by the company. 47% and 37% is the respective market share which company owns in Shampoo and Personal Care Segment.
- As of Sept’20, the company spent 9.79% on advertisements as a % of total sales, which has shown a good rise from 7.46 of June’20.
- The net Profit Margin for the company is 14.77% as of FY20, which has surged from 13.59% as that in FY19. Current NPM is the highest of that in the last 5 financial years and the 3 Yrs. Avg. The net Profit Margin is 14.26%.
- In FY20, HUL showed a Revenue Growth of 1.2% from the previous FY. 3-year CAGR is 6.16%, which means that in recent years, the revenue growth has been subdued. A similar trend is visible from Net Profit Growth, 1-year CAGR is 11.46% whereas 3-year CAGR (14.66%) is higher.
- The company has a very healthy and consistent cash flow from Operating Activities. Outflow in cash flow from financing activities surged in FY20 as the company paid a higher dividend than the previous year.
HUL Case Study Financial Ratios
1. Profitability Ratios
- EBITA Margin for the company has been increasing for the last 5 financial years except for FY19, in which it witnessed a small dip from 20.7 to 19.91. As of FY20, EBITDA Margin is 21.54%.
- Hindustan Unilever has a premium RoE of 84.15 (FY20), and a consistent rise in the same has been visible for the last 4 years. The 3 year avg RoE is 79.76%.
- The company enjoys 3-digit RoCE, which is very well respected by the market and a similar rising trend is visible in RoCE as that of RoE. As of FY20, RoCE is 114.67% and the Avg ROCE for 3 years is 110.16%.
2. Leverage Ratios
- As of FY20, Quick Ratio and Current Ratio for the company are 1.02 and 1.32 respectively, which indicated its good liquidity position. These levels have been more or less the same for the last 5 financial years, which is a positive sign for the company.
- HUL is a 100% debt-free company and its Interest Coverage Ratio is 48.69% as of FY20. Although this level is very good currently, it was 261.73 in FY19.
3. Efficiency Ratios
- Currently, the asset turnover ratio for the company is 2.4, which is slightly lower than the previous year but this figure has been almost constant in recent financial years.
- The inventory turnover ratio witnessed a continuous rise from FY16 (12.04%) to FY19(17.53%), which later dipped to 17.18 in FY20 due to virus outbreak disruptions.
- The number of receivable days has decreased (12.79% in FY19 to 11.83% in FY20) and the number of payable days has increased (90.77% in FY19 to 92.86% in FY20), indicating the company’s increased bargaining power over the buyers and suppliers.
Shareholding Pattern of HUL
- Promoters own 61.9% of the company as of the December quarter of 2020. Although it has been the same for the last 3 quarters, a fall was seen from the level of 67.18% in March 2020. The best part is that promoters do not pledge a single share.
- FIIs hold 14.92% of shares of the company as of December 2020, which has surged from the level of 12.32% in the same period the previous year.
- DIIs own nearly 10.72% shares of the company, which was around 6.68% a year back. Both FIIs and DIIs have increased their shareholding in the previous years.
- Public shareholding has witnessed a fall in recent quarters, from the level of 14.95% in Jun2020 to 12.46% in Dec 2020.
In this article, we tried to perform a quick Hindustan Unilever Limited (HUL) case study. Although there are still many other prospects to look into, however, this guide would have given you a basic idea about HUL.
What do you think about HUL fundamentals from the long-term investment point of view? Do let us know in the comment section below. Take care and happy investing!
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