In year-1 of GSK integration (considering that April 2020), HUL has undertaken numerous measures to drive development – some of them becoming, launch of 500gm pouch pack at 20% discount to current 500gm refill pack (Chart 1), newer premium variants (the ‘Plus’ variety), (3) new customer communication with concentrate on components (“milk, wheat, vitamins” campaign) and most likely larger concentrate on sachets and other very affordable packs (we reckon there is a market place chance to launch a sub- rS 5 sachet as properly).
Scenario: We reckon that the probability of pouch pack cannibalising the refill pack (as its 20% less costly) is higher. This may well be potentially interpreted as re-investment of synergy rewards from GSK – HUL merger (which is not a base case for consensus, in our view). The crucial query which (then) arises is no matter whether there exists (or existed) a value-affordability mismatch in nutrition category which was hindering category development. ADD retained.
Double-digit volume development needed to justify the steep value-offs: In our view, the most likely cannibalisation of 500gm refill pack by 500gm pouch pack in nutrition portfolio imply either a steep gross margin decline and/or re-investment of possible synergy rewards from GSK acquisition. We think that such steep value reduce may well be potentially viewed as adverse by consensus if it does not lead to double-digit volume development (nutrition organization reported double-digit income development in Q3FY21). If HUL is productive in regularly delivering double-digit volume development in nutrition, it most likely implies recruitment of new buyers (larger penetration) apart from larger usage. Driving premiumisation can come about later on – a possible stock rerating occasion. In previous, HUL has been productive in driving premiumisation – EBITDA margin expanded ~930bps to 24.8% from 15.5% more than FY2010-2020 (see Chart 2) and improved mix (channel, category, brand and so on.) was an crucial driver. Margin reconciliation, Nutrition organization had a positive influence on HUL EBITDA margins by 60bps and 90bps in Q1 and Q2 respectively implying synergy rewards and a margin accretive organization. Nutrition organization itself enhanced margins by 650bps and 330bps in Q1 and Q2 (this contains the 300bps savings on royalty), in our view.