Doubling HUL’s revenue is a timid target, it can do better
Unilever Plc’s CEO Paul Polman believes India could become his biggest market, although he does not specify a timeline for it. He also says that sales doubled in India in the past seven-eight years and is confident it can be repeated in a similar time frame or by 10 years for sure. Are these flights of fancy or in the realm of the possible is the question one may ask.
Becoming the biggest market in Unilever’s basket depends on how North America does, which is currently Unilever’s largest market (with Latin America closely behind), and how the Indian economy grows. One estimate by PwC says that India’s economy, in purchasing-power-parity terms, will be behind China but ahead of the US by 2050. If that scenario plays out—and it can turn out differently too—India has a good chance of becoming Unilever’s largest market.
That brings us to Hindustan Unilever Ltd’s (HUL’s) past growth and Polman’s forecast for it to continue. Between 2007 and 2016-17, HUL’s revenue more than doubled or rose by 2.6 times to be precise (its fiscal year changed to March in 2008-09). It grew by a compound annual growth rate (CAGR) of 10%. That is good but how did the Indian economy do in this period?
Nominal GDP (gross domestic product) rose by an average annual rate of 14.7% in this period, according to Centre for Monitoring Indian Economy’s database, which means the economy grew faster than HUL. Since the base year for calculating GDP changed from 2011-12, the old and the new series are not really comparable. Let’s look at the growth comparison since 2011-12 then. HUL’s CAGR in this period was 8.3% against the economy’s 11.7%. That’s a narrower gap but still significant.
Now, doubling of revenue in the next 10 years implies a CAGR of a mere 7.2%, and if you take it at seven years, it moves up to 10.4%. India’s long-term potential real GDP growth is said to be 7-8%, and if we take inflation at 4%— the Reserve Bank of India’s inflation target—we are looking at nominal GDP growth of 11-12%.
That still implies HUL will grow at below the GDP growth, not too difficult to achieve but does not appear challenging enough either. If the Indian economy can hit 8% or move closer to double-digit growth, as some optimists think we can, HUL’s growth could go higher.
These are good numbers to hand out, but the real issue is whether HUL is growing at its full potential even now. The past three years have seen its gross sales growth turn sluggish. Some of that is growth slowing, consumers cutting back on spending—especially in rural markets and one-off but lingering shocks from demonetisation and the roll-out of the goods and services tax (GST).
HUL’s focus on profitable growth and its discipline with capital allocation are known. It’s a steady horse to back. One can’t help but think that it could shed a bit of that, turn more aggressive and capture a higher share of the consumer pie. A growing emerging market such as India, warts and all, deserves it. Two comparisons come to mind when assessing HUL’s growth. One is ITC Ltd and how it has rapidly expanded its fast-moving consumer goods (FMCG) portfolio by sustaining investments and with little regard for profit. Even now, its FMCG business reports losses or a very slender profit. One could argue ITC’s cigarettes business subsidizes its consumer business, which it does, but it also has a mix of categories that have turned profitable, and some that are not. The focus is on scale. That business earned revenues of Rs10,537 crore in 2016-17.
Another is the upstart Patanjali Ayurved whose turnover in FY17 is estimated at Rs10,560 crore or nearly a third of HUL’s revenue. The real question Unilever’s CEO should be asked is whether he thinks HUL will still be India’s largest FMCG company by revenue in a decade from now. Investors in HUL will be more interested in knowing that.
The writer does not hold positions in the companies mentioned above.