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Nutrition portfolio round-up – Price cut, new ‘Plus’ range and synergy benefits

In year-1 of GSK integration (since April 2020), HUL has undertaken multiple measures to drive growth – some of them being, (1) launch of 500gm pouch pack at 20% discount to existing 500gm refill pack (Chart 1), (2) newer premium variants (the ‘Plus’ range), (3) new consumer communication with focus on ingredients (“milk, wheat, vitamins” campaign) and (4) likely higher focus on sachets and other affordable packs (we reckon there is a market opportunity to launch a subRs5 sachet as well). Scenario: We reckon that the probability of pouch pack cannibalising the refill pack (as its 20% cheaper) is high. This may be potentially interpreted as re-investment of synergy benefits from GSK – HUL merger (which is not a base case for consensus, in our view). The key question which (then) arises is whether there exists (or existed) a price-affordability mismatch in nutrition category which was hindering category growth. ADD retained.

* Double-digit volume growth required to justify the steep price-offs: In our view, the 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 potential synergy benefits from GSK acquisition. We believe that such steep price cut may be potentially viewed as negative by consensus if it does not lead to double-digit volume growth (nutrition business reported double-digit revenue growth in Q3FY21). If HUL is successful in consistently delivering double-digit volume growth in nutrition, it likely implies recruitment of new consumers (higher penetration) apart from higher usage. Driving premiumisation can happen later on – a potential stock rerating event. In past, HUL has been successful in driving premiumisation – EBITDA margin expanded ~930bps to 24.8% from 15.5% over FY2010-2020 (see Chart 2) and better mix (channel, category, brand etc.) was an important driver.

* Margin reconciliation (see Table 1): Nutrition business had a positive impact on HUL EBITDA margins by 60bps and 90bps in Q1 and Q2 respectively implying synergy benefits and a margin accretive business. Nutrition business itself improved margins by 650bps and 330bps in Q1 and Q2 (this includes the 300bps savings on royalty), in our view. However, Foods & Refreshment EBIT margins declined 380bps YoY in Q3FY21 – we believe that in addition to the tea business margin impact, this decline may potentially be due to price-offs in nutrition portfolio implying reinvestment of synergy benefits towards driving affordability.

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