Energy shot for HUL: Will buyout of GSK's Horlicks, Boost brands work wonders for the consumer giant?

The race to grab a larger share of the daily Indian consumer basket is becoming increasingly apparent, and the long-term growth opportunities just can’t be ignored by both multinational and Indian companies. On Monday, this trend had become visible once again visible with Hindustan Unilever announcing the merger of GlaxoSmithkline Consumer Healthcare (GSKCH) with itself. The above development would bring the well-established and popular health food drinks like Boost, Viva and Maltova in the portfolio of HUL. Earlier, in late October 2018, Heinz India, an unlisted entity, had also announced the sale of some its consumer brands including popular brands like the energy drink Complan and Glucon D, Nycil – the prickly heat powder and a ghee brand jointly to Zydus Wellness and Cadila Healthcare. Meanwhile, in the case of the merger between HUL and GSKCH, it has valued the latter at Rs 31,700 crore or nearly 6.8 times sales for the year ended March 2018. Also, on a valuation metric, enterprise value to EBITDA (operating profit for the year ended March 2018), this deal has been announced at a steep valuation of nearly 26.4 times. However, GSKCH has operating margins of nearly 25.9 percent for the year ended March 2018, which is superior by industry standards. In the case of unlisted Heinz India divesting certain brands recently, according to data available from media reports online, the transaction was done for approximately Rs 4,595 crore, or nearly four times trailing 12-month sales ending 30 June 2018. Also, on the valuation metric, EV to EBITDA, as per data available online, this transaction was done at 20.4 times on a trailing 12-months basis. [caption id=“attachment_1674347” align=“alignleft” width=“380”]  Reuters[/caption] At first glance, this deal looks expensive from the point of view of HUL, but the acquisition of Boost, Viva and Maltova would significantly boost its foods and refreshment business, going forward. And for HUL, the attractiveness of the health food drinks market with brands like Boost, Viva and Maltova is quite apparent. Out of India’s 1.3 billion population at the end of the calendar year 2017, nearly 37 percent of the population is below the age of 19 years. In this segment of nearly 480 million school children and young adults, a large majority of the above have a deficiency in micro-nutrients and are undernourished, as per various studies and research reports. It’s no surprise that with increasing attention to the health and wellness needs of students and young adults, the market for health food drinks is set to boom over the next few years. And the market for health food drinks, which was estimated at Rs 7,700 crore during the calendar year 2017 is set to rise to Rs 11, 900 crore by the calendar year 2022, according to strategy consultants A C Nielsen. It’s no surprise that the HUL stock price was near 4 percent to close at Rs 1,825 on Monday. HUL’s food and refreshment business include iconic brands like Lipton, Knorr, and Annapurna. The above division had sales of Rs 3,489 crore in the first half of the financial year 2019, and taking into account GSKCH’s half-yearly turnover this financial year of Rs 2,564.6 crore, HUL’s food and refreshment combined business turnover could easily cross Rs 10,000 crore on an annual basis.

HUL also has one of the best pan India distribution networks, both amongst the unorganized khokha or neighborhood shops along with the fast-growing modern trade like malls and supermarkets. It does appear logical that once the regulatory approvals for this merger are received, HUL would be keen to scale up the volume and turnover of Boost, Viva and Maltova brands in its existing distribution network, in a bid to justify the valuations of this deal.

Slowdown in consumer expenditure HUL’s latest move comes at a time when the country’s GDP had slowed to 7.1 percent in the September 2018 quarter versus 8.2 percent in the earlier quarter. Also, of concern was that growth in private consumption expenditure had moderated to 7 percent growth in the second quarter of the current financial year vis-à-vis a buoyant 8.6 percent growth reported in the first quarter. Nevertheless, acquisitions/takeover of consumer brands is not dependent on just one-quarter of GDP growth, and the long-term growth prospects of the health food drinks market do look attractive for players like HUL. (The writer is a senior columnist)