Hindustan Unilever Ltd. (HUL) Explained: A Master of Acquisitions

On 23 July 2024, right after the government's budget, Hindustan Unilever Limited (HUL) revealed its financial results for the first quarter of FY 2024-25.

HUL showed a 2% Year-Over-Year (Y-o-Y) growth in its sales, 3% Y-o-Y growth in its profits and 4% Y-o-Y growth in its sales volume.

These are good growth numbers, and over the years, HUL has built an empire for itself, but we all know it's easier to build after someone has already laid the foundation for you.
Hence, HUL’s reputation as an acquirer.

HUL is a company with a history–it's the name behind the many brands we use in our daily lives. In fact, 9 out of 10 households in India use one or more of HUL's brands.

HUL is known for its mass product appeal, but it's shaking things up. Over the last three years, the contribution of premium products has gone up by 3%. It might seem small, but before you get hung up on the number, consider HUL’s sheer scale.  

Speaking of HUL's scale…
Let’s see HUL’s true nature, and how its many acquisitions have made it the successful company we know today.

HUL's Acquisition History: A Strategic Play

As per the beliefs of our Co-Founder, Pranjal Kamra:
"If you are still looking at HUL and seeing a Fast Moving Consumer Goods (FMCG) company, then you are wrong. It's actually a platform company.”

Makes you wonder what exactly is a platform company.

Well, these companies do not focus a lot of their energy on developing new products or ensuring product market fit. Instead, they acquire companies that have well-developed and established products in the market.
Now, try aligning the concept of a platform company with HUL, and things will start clicking into place.

HUL follows a simple formula: If it's a hit, then it fits.
Imagine a scenario where a brand is well developed, and the people love it, like Ponds or Brooke Bond. HUL will simply acquire them instead of manufacturing a competing product. Then, it focuses on increasing the sale of the product using its large distribution network.

Think of HUL’s distribution network as its Brahmastra. A super powerful weapon that spans more than 90 lakh retail outlets through its chain of 35 distribution hubs and over 3,500 distributors.

Hey, the strategy works, and here is proof:

Brands acquired by HUL have grown into giants over the years; the table above is an example of this. Kissan now brings in over ₹1,000 crore, Pond’s, Rin and Lux bring in more than ₹2,000 crore each, and Lakme brings in more than ₹1,000 crore in revenue as a contribution to HUL’s overall sales.

HUL’s marketing also plays a big role in its rising sales. Every time you go shopping, you see hundreds of products, but you choose to buy a specific one. HUL knows that there's more work to be done after getting the products on the shelves. That's why it spends a lot of money on marketing, creating campaigns that often connect with the public on an emotional level. Throughout the years, it has brought us some gems, like the “Daag Acche Hain” campaign.

In FY23-24 alone, HUL's marketing expenses were a whopping 10% of its total sales, at ₹6,489 crore.

In 2021, 10 advertisers were contributing to 60% share of ad volume and HUL stood first in that list. Its dedication to marketing its products is nothing if not aggressive. 😮‍💨

Let's understand how it all started.

HUL's Foundation Story & Business Model

HUL's foundation story is an interesting one, with its roots tracing back to not one but three different companies:

• Hindustan Vanaspati Manufacturing, established in 1931
• Lever Brothers India Limited, established in 1933
• United Traders Limited, established in 1935

In 1956, these three companies merged into one and formed Hindustan Unilever Limited, just like this ⬇️.

Here is an interesting tidbit for you. Hindustan Unilever Limited is “Hindustani” only in its name. It's actually a company of British descent, and yes, someone did have the brilliant idea (sarcasm) to copy HUL.

HUL's Business Model

HUL's presence in the market is so vast and so widespread that it's simply amazing.

Here is a little more information on its business segments:

• Home Care: This segment includes popular brands like Vim, Cif, Comfort, Rin, etc., basically offering home cleaning & hygiene products.
• Beauty and Well-being: HUL is fairly new in this segment. It includes skin care (Vaseline, Dove and Glow & Lovely), hair care (Sunsilk, TRESemmé, etc.) and colour cosmetics products (Lakme).
• Personal Care: This is also a comparatively new segment for HUL. It includes everyday products like toothpaste and soap, catered to us as Lifebuoy, Lux, Closeup and more.
• Food & Refreshments: HUL offers everything; coffee, tea, ready to cook breakfast mixes, soup, ice cream, and more. It’s many offerings are spread across well-known brand names like Brooke Bond, Horlicks, Kissan, Kwality Walls, Bru, Knorr, etc.

All these segments are almost at par with one another in terms of revenue margins, too, as evident from HUL's business Segment Breakup (For 1st Quarter FY 24-25).

HUL’s many segments have seen varying volume growth as per the latest quarter company update, with fabric wash seeing a volume growth of high-single-digit in the home care segment. The premium dish wash products led to a volume growth of mid-single digits for the household care segments.

In the beauty and wellbeing segment, hair care saw double-digit volume growth, thanks to Clinic Plus, Sunsilk, and Dove. Non-premium products did not see much growth in skin care and colour cosmetics, but premium products continue to grow. 

In the personal care segment, skin cleaning saw a low-single-digit volume growth and oral care saw a mid-single-digit volume growth.

And lastly, in the food & refreshment segment, coffee and tea both did good, with double-digit volume growth in coffee. Horlicks & Boost did not perform that well, but they continue to gain market share and show promise of growth.

Even though foods solutions, mayonnaise, peanut butter and international sauces continue to make their mark, the foods segment only saw a low-single-digit volume growth, and maybe because we love ice cream, the division saw volume growth in double digits.

With a varied range of product offerings, including foods, beverages, cleaning agents, personal care products, and other FMCGs, HUL is the market leader. It might even be the best-managed one.

FMCG Industry Overview

No FMCG company can afford to miss out on the Indian market, with its vast middle-class population, which, by the way, is more than the total population of the USA.

Now that we have established that it's a big market, let's back it with some data.

From 2021 to 2027, it is expected that the Indian FMCG market will grow at a Compound Annual Growth Rate (CAGR) of 27.9%.

The market has seen leaps and bounds of growth thanks to:

• The rising number of internet and smartphone users
• Improved policy reforms
• Rise in disposable income during the past 5 years

Making transactions has certainly become easier with mobile wallets, internet banking, and debit/credit cards. Going cashless has never been more convenient, and having the ability to buy anything online only feeds the rise of the FMCG sector.

It is projected that the Indian online grocery market will grow in size with a CAGR of approximately 32% by 2032.

Giants in the FMCG sector, like Nestle, Britannia, Hindustan Unilever and ITC, have enjoyed top market positions till now. However, now they have to compete with Direct-to-Consumer (D2C) start-ups Mamaearth, The Moms Co., Bey Bee, Azah, Nua and Pee Safe.

It has taken four and eight years for these new-age D2C brands like Mamaearth and Sugar to achieve ₹100 crore revenue mark, respectively. However, it took nearly twenty-some years for market giants like Revlon and Lotus to reach this milestone.

As we have already covered, the Indian FMCG sector has great future growth projections thanks to:

1. Government Support: The Indian Government has launched several policies like "Make in India", PLI schemes and the National Food Processing Policy to boost manufacturing and food processing capabilities to help economic growth.
2. Growing Rural Market: The rural segment accounts for 35% of total FMCG sales and is still growing, thanks to changing consumer preferences, rising disposable income and improving infrastructure.
3. Youth Population: In sectors like e-commerce and technology, youngsters are creating demand. As the generations become more tech-savvy and consumer-focused, these sectors gain more and more popularity.
4. New Branded Products: New brands have been cropping up left and right and becoming popular with their D2C business models. Consumers are welcoming these new brands with their innovative and diversified products. This has played a huge part in the growth of the FMCG sector.
5. E-Commerce Platforms: Online shopping was popular before, but after COVID-19, its popularity rose as people relied on it more and more. Access to better internet, easy cashless payment options, and the convenience of online shopping are the reasons behind the explosive growth in the e-commerce sector.

Let's see if the industry's growth is reflected in HUL's financials.

HUL's Financials & Management Reporting

Over the last 5 years, HUL’s gross profit margin has seen a decline. However, its revenue and profits have risen at a CAGR of around 10% and 11%, respectively.

HUL's revenue growth, as you see in the infographic above, is thanks to its strong and varied product portfolio.

Also, HUL's 2020 merger with GlaxoSmithKline (GSK) Consumer Healthcare Limited (a major brand acquired by Horlicks) helped boost its sales and profit growth.

The decline in the company’s gross profit margins is due to the pressure of inflation in its key commodity segments. HUL is dedicated to being a value player. It has passed on the benefit of low-priced raw materials to its consumers by not raising the product prices.

HUL hasn't increased the prices, but the company might be giving us less product for the same price. This is called shrinkflation and big brands use it to fool us all the time.

Peer Comparison

In the Indian household and personal care segment, HUL is the largest company in terms of market share by sales.

Now, Let’s see how HUL is faring in comparison to its competitors.

As you can see from the infographic above, HUL has shown great sales growth in the past five years at 9.50%, second only to Nestle. With the industry average being around 8.9%, HUL’s performance has been commendable.

HUL has also maintained healthy net margins over the past five years at an average rate of 16.86%. However, ITC’s net profit margins stand at 28.21%, at the fisrt place in the industry.

In FY2024, HUL’s inventory turnover ratio was 6.59 times, which is quite high compared to the industry turnover of 4.43 times.
 
It’s always a good sign when a company’s inventory turnover is more than the industry average. It means that the company is able to sell its products faster than its competitors. Although once again, HUL was second, this time to Britannia.

HUL’s cash conversion is the lowest in the industry at -70.33 days, and it's a good thing. When it comes to the cash conversion cycle, a negative number indicates that the company gets money from sales before it has to pay its suppliers.

The Bottom Line

As I said, HUL is an empire, but the foundation of this empire is not HUL's hard work. Thanks to HUL’s aggressive acquisition strategy, it skipped right to the good part that comes after developing a product and establishing it in the market.

But can you imagine where HUL would be if its many acquisitions didn't turn out as well as they did?

Maybe HUL would be in the same position that Byju’s is in right now, under a lot of debt and at risk of insolvency. The same growth strategy worked wonders for HUL, so where did Byju’s go wrong?

HUL has been playing the acquisition game for a long time, and it has successfully carved a place for itself in the market, proving that it doesn’t always take innovation to be successful.

Which brand will HUL acquire next?

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