Hindustan Unilever (HUVR) is the largest FMCG player in India. HUVR’s product portfolio consists of a wide spectrum including Home Care, Personal Care, Foods & Refreshments and Water Purifiers. In terms of direct distribution, HUVR has one of the largest direct distribution networks (retail touchpoints) in the FMCG sector serviced by over 3,500 distributors.

INVESTING RATIONALE

→ Strong business model & deeply entrenched distribution network enables HUVR to manage cyclical downturns better: Given the long-standing history of  HUVR, strong product portfolio,  best in class margins and reaching 8 million outlets (distribution network) allows HUVR  to manage downturns better than its peers as has been observed in times of demonetization and GST. Although, its parent  Unilever PLC has revised guidance downwards for CY19 and H1CY20, we believe in the Indian context HUVR is better placed to wade through cyclical downturns following its robust processes and balanced strategy of tactically prioritizing between topline and bottom-line growth by offering most consumers value by keeping a check on costs

→ GSK Consumer merger hugely value-accretive: GSK Consumer’s merger with HUVR would increase  HUVR’s presence in foods (malted foods) category and could aid ~5-7% accretion to earnings upon the successful integration of the merger. Besides, the management indicated that's EBITDA Margins are likely to add  1000bps  more to the current ~25% margin profile. Health Foods, which is a Rs. 7,700 cr. category in  India has just  14%  rural penetration, HUVR with vast distribution reach (3x direct distribution reach over GSK Consumer) has huge growth potential in this category

→ HUVR offers relative comfort in earnings growth in the consumer staples space: HUVR has constantly expanded EBITDA margins over the past 8 years and has industry leading return ratios, led by its focus on cost-efficiency plans & premuimization. It offers most visibility (~18% earnings CAGR over FY19-21E) in the FMCG-staples packs with multiple drivers for growth with its (a) WIMI strategy, (b) strong execution, (c) thrust on Naturals portfolio, (d) focus on premiumization and market development to drive profitability improvement, (e) extensively employing technology and data analytics to remain ahead of the competition

* Note: Stock Investment horizon approx. 6-9 months. CMP as on 3rd January, 2020.