Unilever Plc’s offer on Tuesday for an additional 22.5 percent stake in its Indian arm Hindustan Unilever (HUL) at a 20 percent premium took most by surprise. This is Unilever’s biggest deal in as many as 13 years since it acquired Best Foods for USD 23 billion. So why is Unilever betting so heavily on HUL at a time when the Indian economy is growing at its slowest pace in a decade?
Here are some reasons:
1. India is tied with Brazil as the second biggest market for Unilever in terms of turnover after United States where growth has slowed down, particularly in North America, as per Reuters report. Hindustan Unilever has the largest market share of Indian consumer market.
2. Unilever reported sales growth of 4.9 percent in its latest filing, its slowest quarterly growth in two years. Its earnings were boosted by 10.4 percent growth in emerging markets, which now account for 57 percent of its total revenue, according to Bloomberg.
3. HUL, on the other hand, reported best ever annual operating profit margins of 20.22 percent. The last time it clocked 20 percent plus margins in 2003. The return on equity (RoE) which measures the ability of the company to generate profits with the money shareholder has invested was as high as 76 percent. Unilever’s RoE is much lower at 30.42 percent as per data compiled by Reuters. HUL is a debt free company.
4. Unilever targets to generate revenues of 80 billion euros by 2020 and three-quarters of it will come from the emerging markets like India and China.
5. Apart from raising stake in HUL, Unilever delisted its subsidiary in Pakistan last November and in 2009 it acquired controlling stake of its subsidiary in Vietnam. Unilever is clearly focusing on the emerging markets for future growth by either hiking stake or delisting subsidiaries.