Home / Markets / Mark To Market /  Jawa’s new job: How to make HUL bigger

Hindustan Unilever Ltd (HUL) is all set to pass the reins to Rohit Jawa, who will take over as the managing director (MD) and chief executive officer (CEO) with effect from 27 June. Jawa will succeed Sanjiv Mehta, who is due to retire after heading the company for a decade.

HUL’s performance under the leadership of Mehta has been notable. As the chart alongside shows, the fast-moving consumer goods (FMCG) company’s earnings per share is set to grow by 11% on a 10-year compound annual growth rate (CAGR) basis. This is ahead of many FMCG peers. HUL now accounts for a third of Unilever Plc’s market capitalization versus less than 10% a decade ago, said analysts at Jefferies India.

Against this backdrop, it helps that Jawa comes with rich experience across Asian consumer markets in his career of about 35 years. He has served as chairman for Unilever China and Philippines. During his stint, revenues at Unilever China grew at a CAGR of 9% over 2017-2021, compared to 5% in the previous five years.

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“We believe this change of guard will provide HUL an enhanced boost versus peers, given both countries (China and the Philippines) under Mr Jawa have not only undergone a consumer evolution ahead of India, but also experienced transformation leading to these companies growing faster," said Nomura Financial Advisory and Securities (India) analysts in a 13 March report. This was led by volume growth, rising penetration (despite being over 85% levels) and margin expansion, they added.

Note that the change in leadership, which is along expected lines, comes at a time demand conditions in the domestic market are subdued. Rural demand recovery has been slow and there are worries about the possibility of 2023 being an El Niño year. For Jawa, the other focus areas include scaling up recent acquisitions, enhancing GlaxoSmithKline Consumer Healthcare portfolio and dealing with the rising competitive intensity.

Leadership changes in FMCG firms are often seen as exciting. Recall that shares of Godrej Consumer Products Ltd had surged by 22% in a day post the announcement of Sudhir Sitapati’s appointment as MD and CEO in May 2021. However, HUL’s shares have not budged in the past two trading sessions after news of Jawa’s appointment. “GCPL was going through a rough phase and investors hoped the leadership change would improve performance. But that is not the case with HUL, which is already on a strong footing when compared to peers," an analyst said requesting anonymity. As such, the near-term outlook remains dull. “Our industry interactions indicate FMCG market growth in January – February remaining broadly similar to muted trends witnessed in the previous quarter, especially in November – December, which saw a slowdown after a festive-related boost in October," said analysts at Jefferies in a 12 March report. The FMCG industry saw 7-8% value growth in January with volumes declining mid-single digits and rural continuing to lag urban, they added.

HUL’s year-on-year (y-o-y) revenue growth hereon would moderate as gains from price hikes fade. But woes on margin front have likely bottomed out even as commodity costs are up y-o-y. Lately, hike in royalty fees payable to Unilever has weighed on investor sentiments as this would hit profitability. Hence, new CEO’s efforts to expand margin will be watched, especially considering HUL has seen its Ebitda margin expand by about 10 percentage points over FY12-FY22. HUL’s shares are 10.5% below their 52-week highs seen in December. The stock trades at 48.5 times FY24 estimated earnings, showed Bloomberg data, which is not exactly inexpensive.

Vineetha Sampath
Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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