HUL presents good opportunity to GSK shareholders; to add value in long run

Presence of latter in fast-growing segments to add value in long run

From the share-swap ratio angle, the Hindustan Unilever (HUL)-Glaxosmithkline Consumer Healthcare (GSKCH) deal augurs well for the latter’s shareholders. However, given the premium valuations of HUL, which may cap near-term returns from the stock, should GSKCH’s shareholders stay invested? 

Analysts believe that growth prospects for HUL opens up a good opportunity for GSKCH’s shareholders and they should check in to the country’s largest FMCG player.

“GSKCH’s shareholders are getting HUL shares at a discount and the strong growth potential of HUL justifies the premium valuation. Thus, the former could get good returns in the medium-to-long term,” says Vishal Gutka, AVP at Phillip Capital. 

Edelweiss Securities, too, increased the valuation multiple of HUL to 55 times its FY20 estimated earnings from 50 times earlier, after the announcement of the deal. They expect over 12 per cent upside in the HUL’s share price over the next year.

Apart from an expected push to GSKCH’s products with a strong distribution set-up of HUL across the country and HUL’s vast experience in the consumer space, what GSKCH’s shareholders get is HUL’s branded presence in segments other than food and refreshment (F&R), such as home and beauty care.

As per HUL’s reported numbers for 2017-18 (FY18), about 80 per cent of its revenue comes from home care and personal care segments, while these portfolios accounted for around 86 per cent of its operating profit (earnings before interest and tax). 

Further, HUL had earned about 21 per cent operating profit margin from these two segments against less than 20 per cent of its overall margins. 

Over the last three fiscal years till FY18, revenues from these two segments grew about 18 per cent, outpacing the 12 per cent growth in overall operating revenue. 

Moreover, with this deal, HUL can leverage GSKCH’s network in chemist channels to market its personal/beauty and home care products, say analysts.

Besides, synergy benefits could improve operating profit margin. 

Analysts estimate that the FY21 operating margin (deal likely to be completed by December 2019) of the combined entity would be 800-860 basis points more than GSKCH’s and HUL’s individual margin profiles. 

This improves HUL’s earnings prospects and value for shareholders.