Industry Overview

HUL operates in the FMCG segment. Currently the FMCG sector in India is worth $49 billion
and is expected to grow at CAGR of 20.6% for the next 4 reports according to a research
report by Assocham – TechSri in October 2016. They have predicted that the sector will
grow to $104 billion by 2020. The reform measures taken by the government like the GST
Bill, Food Security Bill, increasing the FDI Limit and the 7th Pay commission will provide a
significant boost to the FMCG sector. With regards to demographics, India is experiencing an
exponential growth in the middle class population for the last decade. As per National
Council of Applied Economic Research (NCAER), India’s middle class population has touched
267 million. It is expected to double around 547 million by 2025. Also with disposable
income increasing, this two factors will play a crucial role in the growth of this sector.

Figure 1: FMCG Sub Sectors: Sales wise Distribution

Figure 1 shows the percentage in the total sales of the various sub components that form
the FMCG sector in India. As it can be seen, Food Products dominate with around 43% of
sales while Personal Care is the second most important category with a share of 22%. This
trend is expected to continue in the future as well.
HUL

HUL is the market leader in the FMCG sector in India. It had a turnover of over Rs 34000
crore in FY16. It has the widest reach among its peers with an reach of 6.3 million out of the
estimated 8 million outlets in India.

Soaps and Detergents 47

Personal Care 30
Food and Beverages 19
Others 4
Table 1: Segment wise Sales(%) – FY16

As can be seen from Table 1, Soaps and Detergents has the highest share among sales with
47%. Personal Care is second with 30% with Food and Beverages is around 19%.

Q3FY17 Q2FY17 Q1FY17

Revenue 8125 (↓1.24%) 8480 (↑1.58%) 7987.74 (↑3.58%)

Net Profit 1037.9 (↑6.83%) 1096 (↑11.5%) 1173.90 (↑9.7%)

EBITDA Margin 16.7% (↓37 bps) 16.56% (↑56 bps) 20.48% (↑70 bps)

Sales Volume ↓4% ↓1% ↑4%

Personal Care 3980.17(↓2.7%) 4027.5 (Flat) 3898.6 (↑2.13%)

Revenue

Table 2: HUL Financial Results FY17

Table 1 shows the financial results of HUL in FY17. From the table we can see that the
Revenue growth has been flat and has decreased by 1.24% (Y-o-Y) in Q3. Sales volume has
also slowed down in the last two quarters (Y-o-Y). This was mainly because of the slowdown
in the rural economy and the effect of demonetization on 3 rd quarter earnings. The personal
care segement which accounts for the highest revenue for HUL has been flat over the three
quarters. However on the positive side, the fall in commodity prices has led to sharp
reduction in input prices. Coupled with cost reductions in advertising, HUL has managed to
post impressive EBITDA Margin figures in the last three quarters. Although it reduced by 37
bps (Y-o-Y) in Q3 on account of demonetization. Apart from this the company has a very low
D/E ratio of around 0.09. It has also has substantial cash reserves of Rs. 2758.82 crores as on
31st March 2016.
With growth slowing down, HUL needs to look at the inorganic route for improving its
revenues and sales volume. HUL is little weak in the Food Business which accounts for
almost half of the sales in the FMCG sector. Also it has no significant footprint in the ever
increasing Health Supplement segment. These two areas are we feel where HUL can
significantly mprove.

Patanjali Factor

Patanjali Ayurvedic founded by Yoga Guru Baba Ramdev has been making waves in the
Indian FMCG market. It generated revenues of Rs. 5000 crores in FY16. In the last 4 years
alone it has been able to grow by 10X whereas other FMCG giants like ITC managed to grow
by 9X over the past 10 years. In the current financial year, it is expected to grow its sales by
2.5X while targeting a turnover of Rs. 20000 crores by 2020. Patanjali’s product portfolio
consists of Ayurvedic and Herbal products which are shaping the Indian FMCG market. It has
helped in making Ayurvedic products popular in India. According to an UBS Securities report
2015, herbal products comprised 6 – 7% of the personal care market in India but they are
growing in volume by twice the segment average. They estimate that herbal will grow to
around 10% of the personal care market by 2020.

HUL has limited portfolio of Ayurvedic and Herbal products in its portfolio. It required
Indulekha Oil for Rs. 330 crore as a response against the changing market conditions. But it
is not enough. We feel more products should be launched in different segments related to
Ayurveda and Herbal.

So we are proposing that HUL look to merge with Dabur India.

Dabur India

Dabur India was an Ayurvedic products maker founded in 1884. It shifted its focus to non
Ayurvedic products in 1997 with a view to expand in international market. With Patanjali
drivaing the Ayuvedic market in India, Dabur India is an excellent position to leverage the
science based Ayurveda supported by validation, research and evidences to capture market
share and drive growth. In FY16, 60% of sales came from Ayurvedic and Herbal products.
 Figure 1: Domestic Sales Segment wise (FY16)

Figure 1 shows us the Domestic Segment wise sales for Dabur India in FY16. 42% of its sales
come from Health Supplements, Foods and Digestives etc. This three segments are expexted
to drive the growth I the FMCG sector in the future. Also Haircare and Oralcare constitute a
significant proportion of its sales.

Figure 2: Dabur India Financials

As can be seen from Figure 2, Dabur India has been consistently posting healthy earnings
figures. It has reserves and surpluses of Rs. 3984 crores and a cash reserve of Rs. 2200
crores as of 31st March 2016. It has a Net Profit Margin of 15% which is much better than
HUL’s 12.77%.

Dabur has four main cash cows – Hair oils, Juices, Digestives and Health Supplements and
Toothpastes. This portfolio will complement HUL’s product offerings. Also 45% of Dabur’s
sales take place in rural areas which is expected to rebound this year on the back of a
normal monsoon.
In Juices, Dabur’s Real Juices are the market leaders. While in the Health Supplement and
Foods segments it has strong presence. Dabur Honey with a market share of 63% and Dabur
Chyawanprash with a market share of 65% are the market leaders. Dabur Honey was
approved by the Food Safety and Standards Authority of India which rivals like Patanjali do
not have. In the hair oil segment, Dabur Amla Hair Oil and Vatika Oil are established brands
and have doing well for the company.

We feel that HUL – Dabur merger would be beneficial for both the companies. HUL with its
wide distribution network would be able to leverage Dabur’s products and increase revenue
by improving their reach. It would also help in significantly reducing costs by improving the
efficiency of the supply chain system. This merger would help in arresting the growth of
Patanjali which was becoming a major player in the FMCG market. It would add value to the
shareholders of both the companies.