Hindustan Lever v/s ITC
The Big Fight
Nikhil Vora (M) +91 –9821132471 / (Dir) +91-22-56383308
[email protected]
1
HLL v/s ITC
Circa 2000… The Big Fight
ITC: Reaching depth and breadth of the nation, but under constant litigation threat and desperately looking for newer avenues
HLL: Reaching two third of Indian households, best of the brands in its kitty, a venerable position among competitors (Rs m) 120
Gross Revenues
HLL = 1.4x ITC H LL
ITC
100
80
60
40 FY96
FY97
FY98
Who would you bet on?
FY99
FY00
HLL v/s ITC
Who would you bet on? The Big Fight
On former
But, we did not…
HLL v/s ITC
And we have been proved right… The Big Fight
Today… Gross Revenues
(Rs bn) 150 HLL
ITC
ITC = 1.2x HLL
130
110
90
70 FY01
FY02
HLL: Core business stagnating, intense competitive pressure and failure to identify growth drivers
FY03
FY04
FY05
ITC: No more just a cigarettes business, limited competition, growth derived from multiple fronts
HLL v/s ITC
Why did we bet on ITC? The Big Fight
HLL Deflationary cycle Margin myopia
A mere price taker Seen in recent price wars
Absence of growth drivers • 50% 50% of of rev reve enu nues es from from highly stagnated markets • Personal pr product - the only growth driver • Virt Virtua uall abs absen ence ce in food foodss
ITC Business Model
Growth cycle 3Cs impact
Ability to call shots
Calling the shots Not a single brand has ever seen a price decline
Growth drivers
Multiple growth drivers • Core Core busine business ss of of cigare cigarette ttess - far from from satur saturati ation on point point • All All busin business esses es highl highly y scalable • As busine businesses sses scale scale u up, p, profitability to increase
HLL v/s ITC
Abilit Abi lity y to call call sho shots ts – the ke key y stren strength gth The Big Fight
Competitive pressure
Brand relevance
Ability to call shots/ Pricing power
Resource employment and excess cash generation
Appetite to take risk and stay invested
Ability to evolve and enter newer businesses
Cause and impact of the overall business model and competitive strength
HLL v/s ITC
HLL HL L – A pr pric ice e ta take ker? r? The Big Fight
Competition a nuisance value value – space too cluttered with small players Soaps
Detergents
Value Market share 59.7%
Value Market share 380bps drop in 5 yrs
HLL
HLL
Value Market share 38.6%
Value Market share 200bps drop in 5 yrs
HLL
Nirma
HLL
Nirma
Ghadi
Nirma
Reckitt
Nirma
Reckitt
P&G Henkel
Godrej
Ghadi P&G
Godrej
2000
Henkel
2005
2000
2005
Have not only eaten market share, but bu t even stripped HLL’s pricing power
HLL v/s ITC
HLL HL L – A pr pric ice e ta take ker? r? The Big Fight
Oral Care
Value Market share 36.4% Colgate
Hair Wash
Value Market share 380bps drop in 5 yrs
Value Market share 70%
Value Market share 2100bps drop in 5 yrs
Colgate HLL
HLL
HLL
HLL
P&G Cavinkare
Dabur
Anchor
P&G Dabur
Amar Dabur
2000
2005
2000
2005
HLL v/s ITC
HLL HL L – a mer mere e pri price ce ta take kerr The Big Fight
High price elasticity = low brand relevance Price = functional benefit
Growt owth in Rea Realiz lizati ation / tonne nne
Detergents 8.0%
Volume ume Growth
6.7% 5.0%
6.0%
4.3%
4.0% 2.0%
1.2% 0.5%
0.0% -0.5%
-2.0% -4.0% FY01
FY02
-3.4% FY03
-1.2% -3.1% FY04
-2.8% FY05
Only option option - follow competitive pricing pricing to protect volume share share
HLL v/s ITC
ITC IT C – a pr price make kerr? The Big Fight
Where is the competition, except from ‘bidis’?
High brand loyalty: low price elasticity
Consistent price increase with no switchovers seen
ITC
FY95
FY00
FY05
CAGR AGR - 10 years (%)
CAGR CAGR - 5 year yearss (%)
50,609
66,145
69,998
3.3
0.57
Unit realization (Rs/stick)
0.66
1.05
1.43
8.0
6.4
Excise paid (Rs/stick)
0.40
0.60
0.85
7.8
7.2
Net Cigarette price (Rs/stick)
0.26
0.45
0.58
8.4
5.2
Cigarette volumes (m)
Not a single brand has ever seen a price decline
HLL v/s ITC
Cash generation ability The Big Fight
HLL: Core busi business ness - reced receding ing cash
Lower price realization, higher resource employment in soaps & detergents and higher ASP spends
Negative return on incremental capital employed
Cash generation from overall operations of HLL dropped from Rs21bn to Rs13bn in two years
ITC: Huge cash generation
Rs20bn generated annually from core business; cash generation from cigarettes business growing at 10% CAGR
Incremental EBIT on an incline at lower capital employed
Cash generation to improve in the absence of competitive pressures
HLL v/s ITC
Appetite and willingness to take risk The Big Fight
HLL: Play in known territory
ITC: play where others fear to tread
Has not made successful entry in
short-term profits for long-term
any newer business
gains
Quick Quick return returnss or move move out out – not willing to add businesses making
businesses (e-Choupal, Agri,
Moved out of businesses like Bakery, Confectionery, RTE, Healthcare, Services, etc within two years of launch
Entered capital intensive, low margin and long gestation
loss in short run
Willingness and appetite to forego
Hotels)
Market leader or significant player in the businesses that HLL exited from
HLL v/s ITC
HLL HL L – de dear arth th of in inno nova vati tion on The Big Fight
?
2010
2000 Early exit – did not have patience to stay stay invested 1990 s r a e Y
1980
1970
1960 Rin Bar
FAL Skin Cream
Clos Close e up up Cli Clinic Plu Plus Vim Bar Bar
Ann Annapu apurna Atta Salt
Max
Ayush
Kissan
Kissan
Sangam
Herbal
Bistix
Soupy
Direct
Snax
Product portfolio unchanged unchanged in the past five years
Pure It
HLL v/s ITC
ITC – tr trans ansiti ition on to to a con consum sumer er pla play y The Big Fight
Sales Sales – Rs135. Rs135.9bn 9bn Cigare Cigarette ttess – 70% Sales Sales – Rs118.2bn Rs118.2bn EOU - Packag Packaging ing
7% share of the biscuits market
Sales Sales – Rs110. Rs110.2bn 2bn Launch of Sunfeast
Atta: Atta: Mkt Mkt Leade Leader, r, 36% 36% share. 2nd largest in confectionery
Sales Sales – Rs98.4 Rs98.4bn bn Launch of Candyman Aashirvaad Atta
Hotels: Rs4bn, acqui acquire red d Ansal Ansal Hotel Hotelss Foods: Rs3.6bn
Sales Sales – Rs86.8 Rs86.8bn bn Hotel business re-branding Entry in to foods business Sales Sales – Rs79.5 Rs79.5bn bn Entry in to Retailing Launch of e-choupal
E-choupal:Rs3.5bn Choupal Sagar: A rural retail mall
Sales Sales – Rs75.8 Rs75.8bn bn Cigarettes 87%
1999
2000
2001
2002
2003
2004
Dependence on cigarettes business coming down
2005
HLL v/s ITC
Redirecting funds towards future growth drivers The Big Fight
ITC: Funds redirected towards long gestation businesses Cigarettes
Non-cig (FMCG)
Hotels
Agro-biz
Paper/ Pack
Total (Rs m)
Revenues (%)
70
4
3
12
11
143,191
% of EBIT
89
(8)
4
4
11
25,968
EBIT %
23
(35)
25
5
18
20
Capital Employed (%)
23
5
26
14
32
53,878
185
(74)
7
13
16
42
RoCE (%)
HLL: Continued dependence on the the core business Soaps & detergents
Personal products
Beverages
Foods & ice cream
Others
Total (Rs m)
Revenues (%)
44.6
24.6
11.9
3.7
15.4
100,607
% of EBIT
44.5
46.4
13.7
(5.0)
0.4
17,418
EBIT %
17.3
32.7
20
(23.1)
0.4
20
Capital Employed (%)*
34.9
36.6
5.7
(1.8)
24.7
20,927
106.2
105.6
201.1
NA
1.3
83.2
RoCE (%)
* Unallocated Capital employed distributed in the proportion of EBIT %
HLL v/s ITC
The Big Fight
“All products, services and great ideas, no matter how visionary, eventually become obsolete. But a visionary company does not necessarily become obsolete”
- James Collin Collinss and Jerry Porras Porras in ‘Built ‘Built to to Last’ Last’
HLL v/s ITC
Ability to evolve The Big Fight
HL L
ITC
Dabur
Marico
2000
Soaps & detergen detergents ts – 40% Personal Personal Products Products - 17%
Cigare Cigarett ttes es – 87% Absence in other FMCG space
100% herbal, traditional business
Edible and hair oil 100%
Evolution
Focused consumer play – power power brand branding ing
A pure consumer play
Consumer and health care around herbal proposition
Consumer care and healthcare
Attempted but failed – Biscuits, Ayush, Snoupy Snax, Confectioneries
Biscuits, Confectioneries, RTE, Retailing, other FMCG
Fruit Juice, skin care, International business, toothpaste,
Soaps & detergen detergents ts – 45% Personal products–26% Shift partly owing to hiving off of businesses businesses
Cigarettes contribution down to 70%
New ventures accounting for over 30%
NPD contributing to 18%
0%
11%
15%
10%
New businesses
2005
5 years CAGR
Evolu Evolutio tion n – the the key to grow growth th
Skin care – products products Skin care – services services Cosmetics International business
HLL v/s ITC
The Big Fight
"Unless you try to do something beyond what you have already mastered, you will never grow“
Ralph Waldo Emerson
HLL v/s ITC
HLL HL L - wh what at wil willl driv drive e grow growth th?? The Big Fight
Scope for category to grow? Categories
Market Size
Urban Penetration
Rural Penetration
Total Penetration
Personal wash
55
97.6
90.7
92.8
Fabric wash
45
89.6
82.9
84.9
Skin care
15
36.6
19.8
24.8
Hair wash
10
40.1
16.3
23.4
Oral care
20
69.8
32.3
43.6
Tea & coffee
35
91.2
82.2
84.9
Incremental scope for HLL within the category? Categories
HLL' share
Personal wash
56
Fabric wash
38
Skin care
60
Hair wash
47
Oral care
33
Tea & coffee
37
Market leadership in 5 of the 6 categories
HLL: Rs100bn company in Rs400bn business
HLL v/s ITC
HLL HL L - wh what at wil willl driv drive e grow growth th?? The Big Fight
Only way way to grow grow – more share share of wallets, wallets, penetration more than 85%
Gain market share from unorganised players
Far from from saturation saturation - penetration penetration below 50%
PCC in India 1/10th of PCC in comparable countries; but growing clutter
Rs1500bn business, just 10% branded, growing at over 20%
Tremendous potential, but needs patience
HLL hasn’t got the foods strategy right, reduced to a marginal player in the business
Soaps & Detergents
Personal Products
Processed Foods
HLL v/s ITC
HLL HL L – an un unim impr pres essi sive ve mi mix x The Big Fight
Soaps & Detergents the least lucrative business
Too many cash cows and few stars
Insignificant presence in most lucrative foods business
h g i H
Skin Care s s e n e v i t c a r t t A t e k r a M
Processed Foods m u i d e M
Hair Wash
Oral care
Soaps
w o L
Detergents Low
Tea / Coffee Medium
Incremental scope for HLL
High
With this product portfolio, HLL can at best expect low double digit growth
HLL v/s ITC
Broa Br oadb dbas ased ed gr grow owth th poten potenti tial al The Big Fight
ITC bus busine inesses sses - far from from sat satura uratio tion n India • Cigaret Cigarettes tes consum consumpti ption on - 14% of the total total tobacco tobacco consum consumpti ption on • Per Per cap capit ita a con consu sump mpti tion on – 141 141 sti stick ckss Globally • Cigar Cigaret ette tess con consu sump mpti tion on - 85% glob global ally ly and and 65% 65% in comp compar arab able le countries • Per Per cap capit ita a con consu sump mpti tion on – 1190 1190 stic sticks ks
Cigarettes – still gives kick
Market sans competition
Hotels – significant ‘room’ for growth
• India India – 0.35% 0.35% of the global global tourism tourism,, ARR much below below glob global al stand standard ardss • Growin Growing g touris touristt arriv arrivals als,, increa increasing sing ARR – shrink shrinking ing gap betwee between n demand and supply of rooms • Eyeing Eyeing to to be the larg largest est play player er - organic organic and inorgan inorganic ic growt growth h plans plans on cards
At a GDP growth over 6%, demand for rooms to double in next five years
HLL v/s ITC
Broa Br oadb dbas ased ed gr grow owth th poten potenti tial al The Big Fight
ITC bus busine inesses sses - far from from sat satura uratio tion n • Pape Paperb rboa oard rd con consu sump mpti tion on – 0.75 0.75kg kg,, 1/7 1/7th of the global average • Value Value adde added d coated coated board board busin business ess – growin growing g at 20%, ITC is mark market et leader • Highly Highly capital capital intens intensive ive busine business, ss, low compe competiti tition on in the long long run
Paperboard and specialty paper
ITC – Rs15 Rs15bn bn investmen investmentt in next four years, years, fast paced paced business business scale up
• Increas Increasing ing out out of home home eating eating and and need need for conv convenie enience nce • High Highly ly frag fragme ment nted ed and and roo room m for for ‘Me Too’ Food Foodss – room room for ‘Me Too’
• Grow Growin ing g at at ov over 20% 20% • Low Low marg margins ins – small small pla playe yers rs to to move move out out in in long long rrun un
ITC – Rs3.6bn turnover turnover in two years, doubling every year, 75 products across 4 categories
HLL v/s ITC
ITC - a he heady mix The Big Fight
Cigarettes
Processed Foods
h g i H
Hotels s s s s e e n n e e v i v i t t c c a a r r t t t t A A t t e e k k r r a a M M
Agri business m u i d e M
Other FMCG
Paper
w o L
Low
Medium Incremental scope for ITC
Each business business – a potenti potential al ITC ITC
High
HLL v/s ITC
Inorganic growth option The Big Fight
HLL
ITC
• Low Low en entr try y barr barrie ierrs
• High High busi busine ness ss barr barrie iers rs
• Only Only ava avail ilab able le opt optio ion n is buy buy sma small ll
• ITC, ITC, a mor morta tall com compe peti titi tive ve fea fearr
brands
Unimpres Unimpressive sive track track record record - Modern Modern Foods: bought at Rs1.5bn, size today < Rs500m • Best Foods: acquir acquired ed brands brands Knorr, Knorr,
Recent acquisitions • Wimco (safety matches) – comp compet etit itio ion n killed • Ansa added d ass asset etss Ansall Hote Hotels ls – adde • BILT (Paper) – added capacity
Captain Cook. Captain Cook discont discontinu inued, ed, Knorr’ Knorr’ss presen presence ce
Scouting for more acquisitions in FMCG,
insignificant
greetings, paper and hotels
Too less value addition and
Buying asset or removing
premium valuations
competition: at fair valuations
HLL v/s ITC
The Big Fight
The two companies have swapped places from where they were in 2000 ITC deriving growth on multiple fronts HLL faltering to identify a growth driver
Can HLL still displace ITC? We doubt…
The differentiators have put the two in contrasting business cycles
HLL v/s ITC
HLL HL L – a def defla lati tion onar ary y mod model el The Big Fight
Low ability to call shots
Margin myopia High profits luring competition to enter and play price game Increased dependence on core business
Stagnant revenues
Low incremental cash generation from core business, low risk taking appetite
No new business entry Absence of scalable growth drivers
Unless HLL does something drastically different, to remain caught in the cycle
HLL v/s ITC
ITC IT C – a pr pros ospe peri rity ty mo mode dell The Big Fight
High pricing power
Long gestation business entry High cash generation from core business, appetite to redirect funds
Reduced dependence on cigarettes business
Lower competitive pressure
Higher revenues, but lower profits in initial years
Multiple growth drivers Increasing profits with growing scale
3C impact (Cigarettes, Cash, Consumer)
HLL v/s ITC
On a different growth trajectory The Big Fight
Gross Sales
Net Profit HLL
HLL
ITC
ITC
35
210.0 190.0
30
170.0 25 150.0 n b s R
n b s R
130.0 110.0
20
15
90.0 10 70.0 50.0
5 FY04
FY05
FY06E
FY07E
FY08E
FY04
FY05
FY06E
HLL: gradual growth and constrained margins ITC: multiple growth drivers and profits with scale
FY07E
FY08E
HLL v/s ITC
HLL HL L – ge gent ntle le cli climb mb ove overr the the hill hill The Big Fight
Year to December (Rs m)
CY03
CY04
CY05E
CY06E
CY07E
101,384
99,269
107,165
115,803
123,847
2
(2)
8
8
7
17,718
11,974
12,894
15,539
17,666
2,201
2,201
2,201
2,201
2,201
EPS (Rs)
8.1
5.4
5.9
7.1
8.0
EPS growth (%)
0.1
(32.4)
7.7
20.5
13.7
PER (x)
19.9
29.4
27.3
22.7
19.9
EV/ EBITDA (x)
17.5
24.2
20.8
17.8
15.6
EV/ sales(x)
3.4
3.5
3.2
3.0
2.8
Book Value (Rs/ share)
8.5
8.5
8.3
9.3
10.7
Price/ BV(x)
18.8
18.9
19.3
17.2
14.9
RoCE RoCE (%) (%)
46.9
33.6
43.3
60.5
62.3
RoNW RoNW (%) (%)
59.8
55
62.3
72.1
72.9
3.4
3.1
3.4
3.4
3.8
Net sales % change PAT Share in issue (m)
Dividend yield (%)
Capitalising on improving macro dynamics; back to basics approach
HLL v/s ITC
ITC – gro growt wth h from from mul multi tiple ple fro fronts nts The Big Fight
Year to to March March 31 (Rs m) m)
FY04
FY05
FY06E
FY07E
FY08E
64,704
76,395
87,914
100,982
114,885
10
18
15
15
14
15,929
18,371
22,016
26,407
32,379
249
249
249
249
249
EPS (Rs)
64.4
74.2
88.9
106.7
130.8
EPS growth (%)
16.2
15.3
19.8
19.9
22.6
PER (x)
26.9
23.4
19.5
16.3
13.2
EV/ EBITDA (x)
17.7
14.7
12.6
10.3
8.2
EV/ sales(x)
6.5
5.4
4.6
3.9
3.3
Book Value (Rs/ share)
260
329
376
437
517
Price/ BV(x)
6.7
5.3
4.6
4.0
3.4
RoCE RoCE (%)
26
26
25
26
27
RoNW RoNW (%) (%)
27
26
26
27
28
1.2
1.8
1.7
2.6
2.9
Net sales % change PAT Share in issue (m)
Dividend yield (%)
Robust core business, rapidly growing non-core business
HLL v/s ITC
Value the trajectory The Big Fight
ITC
HLL
160
120 80
Bigger scale
Better growth
40 0 Sales Turnover
EBITDA
Net Profit
3 yr Revenue CAGR
3 yr PAT CAGR ITC
HLL
25 20 15 10 5
Yet… lower Valuations!
0 PER (x)
EV/EBITDA (x)
EV/Gross sales (x)
ITC ahead on business performance, but disparate valuations
HLL v/s ITC
Valuation gap bridging The Big Fight H L L - PE
I T C - PE
70.0
58.0
46.0
34.0
22.0
10.0 5 9 r a M
5 9 p e S
6 9 r a M
6 9 p e S
7 9 r a M
7 9 p e S
8 9 r a M
8 9 p e S
9 9 r a M
9 9 p e S
0 0 r a M
0 0 p e S
1 0 r a M
1 0 p e S
2 0 r a M
2 0 p e S
3 0 r a M
3 0 p e S
4 0 r a M
4 0 p e S
As the consumer portfolio increases, ITC to get consumer valuations
5 0 r a M
HLL v/s ITC
We still bet on ITC The Big Fight
(Rs. Mn)
HLL - Market cap
ITC - Market cap
640
480
320
160
0
0 0 y a M
0 0 p e S
1 0 n a J
1 0 y a M
1 0 p e S
2 0 n a J
2 0 y a M
2 0 p e S
3 0 n a J
3 0 y a M
3 0 p e S
4 0 n a J
4 0 y a M
4 0 p e S
5 0 n a J
5 0 y a M
HLL v/s ITC
The Big Fight
THANK YOU
Nikhil Vora / Bhushan Gajaria SSKI Securities (M) +91 –9821132471 / (Dir) +91-22-56383308 /
This document has been prepared by S.S. Kantilal Kantilal Ishwarlal Securities Pvt. Ltd. Ltd. (SSKI) and is meant for use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell, or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in, or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document.
