A little spice in the product mix is just what HUL needs

The news has been since denied by MDH, with MDH’s current chairman Rajeev Gulati condemning “frivolous" media reports and saying, “We are committed to take the legacy forward with all our heart." 

HUL has, notably, not said anything so far, but that is not the only reason that the buzz is refusing to die down. It is just that, in terms of a logical extension of HUL’s portfolio, MDH makes a perfect fit. And, although MDH has continued to show strong performance after the death of patriarch Mahashay Dharampal Gulati in December 2020 at the age of 97, his passing has thrown up some question marks over the future of India’s largest independent branded spices-maker.

Padmabhushan Dharampal Gulati (he received India’s third-highest civilian award in 2019) was not just the face of the MDH brand – his photograph features on much of its packaging and he was the face of its hugely popular ad campaigns – he was arguably the driving force of the business, which he started with his father after the family moved over to India from Sialkot in Pakistan. In fact, in 2017, he set a record for being not only the oldest active CEO of an Indian FMCG company – he was 94 at the time – but also the highest-paid one.

Although his son, Rajeev Gulati, has taken over the chairman, the prospect of cashing out must be tempting, particularly at the valuations being talked about – between 10X and 15X of annual sales. Quite apart from the payola, the fact that competition from deep-pocketed organised sector rivals in India’s estimated ₹67,500 crore spices and masalas market has heated up will also add to the pressure on MDH’s management to keep pace, forcing some kind of equity dilution sooner or later. MDH’s current valuations may not hold up as its market share comes under increasing pressure, particularly with both Reliance and Tatas, which acquired India’s biggest online grocer BigBasket recently, amping up their retail forays, and pushing strongly on own and private label brands in this segment.

There is no dearth of competition wanting a slice of the most assured segment of the Indian food market – for, no self-respecting Indian considers any food item as cooked until spices have been added. While the Tatas have already started pushing Sampann as their umbrella brand for spices and staples, HUL’s Anglo-Dutch rival Nestle has extended its popular brand Maggi into readymade spice mixes and condiments. Meanwhile, Norwegian conglomerate Orkla, which had bought popular food brand MTR, also acquired Eastern Condiments, another large independent spice and masala maker last year for around ₹2,000 crore. Then, if ITC is pushing hard at HUL across much of its FMCG and foods portfolio, homegrown Patanjali, whose IPO will add considerably to its war chest, is also snapping at HUL’s heels.

Quite apart from all this, the fact is that HUL, while continuing to maintain a decent EBIDTA margin despite pandemic pressures, is also finding sustaining high organic growth an increasingly harder proposition. Growth in FMCG categories where HUL operates has slowed down further, from mid-single digits last quarter to flat in the current, with a visible slowdown in 2-year y-o-y in Jan/Feb-22. Inflation in input prices is squeezing margins and also hitting end sales volumes. And this time, the slowdown is hitting both its urban and rural markets.

Given all this, a quick inorganic addition of market share, plus a readymade market-leader position, and a century-old and hugely trusted brand, may well make sense for HUL at this point in time, denials notwithstanding. This dish may still be slow-cooking in the pot.