The 20 per cent surge in the price of the Hindustan Unilever stock, after the open offer announcement, may limit any further gains for investors hopping on board now. But the Rs 600 offer price may deliver hefty gains for investors who bought the stock earlier.
Just three months ago, the stock traded at Rs 465. The offer values HUL at 40 times its 2012-13 earnings, compared to the range of 34-42 times for peers, and HUL’s own average of 31 times in the past five years.
But this premium may be necessary if the offer has to pull through, given the long-term growth potential HUL offers. The success of the offer is likely to hinge on institutional investors who hold 30 per cent in the company, tendering their holdings.
Raising India share
But why is Unilever planning to raise its stake in the Indian arm when the regulator is pressuring companies to reduce promoter holdings? With a higher stake, Unilever Plc will get a larger share of sales and profits from India, which is growing faster than developed markets.
Emerging markets chipped in with 57 per cent of Unilever’s revenues in the March quarter, up by 10 percentage points over five years. These markets have been steadily delivering sales growth of over 10 per cent for the past eight quarters. Developed regions, in contrast, saw deceleration — sales in Europe, for instance, shrunk 3 per cent in the March quarter.
Two, the stake hike will bring Unilever’s holdings in its Indian arm on par with other subsidiaries. While its holding in the Indian business is at 52 per cent, in Indonesia and South Africa, it holds 85 per cent and 74 per cent respectively. Stepping up India holding will also bring in higher dividends. Royalties, though, will not be affected with the increased promoter stake.
A higher holding will also give HUL promoters greater voting power. It must be noted that HUL’s proposal in the December 2012 to raise royalty payments to its parent, met with much resistance from investors. Yet, even after this revision, HUL still has lower royalty payments compared to other consumer MNCs.
Going with the flow
Finally, HUL’s decision to raise promoter holdings is in line with the trend of Indian consumer goods companies preferring to be closely held entities or even delisting from the markets. GSK Consumer Healthcare recently raised holding to 72 per cent via an open offer. Peers such as P&G Hygiene and Nestle India have promoters holding over 60 per cent. Cadbury’s India and Reckitt Benckiser delisted a few years ago.
While the company has declared that this is not a precursor to delisting its shares, that uncertainty will hang over the stock. Usually, consumer goods companies prefer to stay private because this keeps sensitive information on segment volumes and sales, market shares, advertising strategies, and launches under the wraps.