Sector Update

December 4, 2018

Rating matrix
Company Rating CMP Old Target New Target % upside FMCG
HUL Hold |1825 |1800 |1855 1.6%
GSKCH Hold |7540 |8000 |8145 8.0%
HUL-GSK Consumer Healthcare merger…
Key financials (HUL)
In March 2018, GlaxoSmithKline Plc had announced a strategic review of
| Crore FY17 FY18 FY19E FY20E
Revenue 33,895 34,619 38,114 43,598 GSK Consumer Healthcare’s (GSKCH) consumer nutrition business,
EBITDA 6,047 7,276 8,564 10,261 including brands like Horlicks & Boost as the company was exploring a
Net Profit 5,037 5,237 6,234 7,626 partial or full sale of its stake in GSKCH by end of 2018. This was triggered
EPS(|) 23.3 24.2 28.9 35.3 by GSK looking to help fund its $13 billion buyout of the Novartis stake in
Adj. EPS(|) 22.5 24.5 29.2 35.3 their consumer healthcare joint venture.

Valuation Summary (HUL) On December 3, 2018, HUL agreed to merge GlaxoSmithKline Plc’s
FY17 FY18 FY19E FY20E nutrition business in a deal worth | 31,700 crore. HUL-GSKCH merger is
P/E 78.3 75.3 63.2 51.7 an all-equity merger with 4.39 shares of HUL being allotted for every
Target P/E 79.6 76.5 64.3 52.5
share in GSKCH, along with GSKCH’s entire operations of nutrition
Div. Yield 0.9 1.0 1.3 1.6
business and contract to distribute the latter's over-the-counter (OTC) and
Mcap/Sales 11.6 11.4 10.3 9.0
RoNW (%) 74.9 74.7 90.0 103.8
oral care brands like Sensodyne, Eno and Crocin for five years. The
RoCE (%) 74.9 79.9 94.4 120.0 transaction will give GSKCH shareholders ~5.7% stake in HUL while
Unilever’s holding in its Indian unit will drop 5.3% from 67.2% to 61.9%.
Key financials (GSKCH)
| Crore FY17 FY18 FY19E FY20E The deal is expected to be completed in a year subject to regulatory and
Sales 4,425.9 4,377.1 4,885.8 5,339.0 shareholder approvals. GSK will also sell brand rights for GSK’s consumer
EBITDA 838.3 883.4 1,078.6 1,195.9 health nutrition business in India to Unilever Plc. As per GSK
Net Profit 656.7 700.1 838.8 941.2
management, once the merger of its Indian unit is complete, GSK intends
EPS (|) 156.1 166.5 199.5 223.8
to sell its holding in HUL.

Valuation Summary (GSKCH) Exhibit 1: HUL-GSKCH share swap ratio

FY17 FY18 FY19E FY20E GSKCH number of shares (crore) 4.2
P/E 48.3 45.3 37.8 33.7 HUL-GSKCH Share Swap ratio 4.39
Target P/E 52.2 48.9 40.8 36.4 GSKCH shares after share swap (crore) 18.5
Div. Yield 0.9 1.3 1.4 1.5
Mcap/Sales 7.2 7.2 6.5 5.9 HUL number of shares (crore) 216.5
RoNW (%) 21.0 20.1 21.8 22.0 HUL-GSKCH number of shares (crore) 234.9
RoCE (%) 30.8 29.8 31.9 32.3
Promoter number of shares (crore) 145.4
Price performance Promoter stake % 67.2%
250 After dilution, promoter stake will be 61.9%
140 Reduction in promoter holding 5.3%
200 Source: Company, ICICI Direct Research
120
150 Exhibit 2: Valuation metrics post merger
Revenue (| crore) EBITDA (| crore) PAT (| crore)
100 100 FY19E FY20E FY19E FY20E FY19E FY20E
HUL 38,571.5 44,121.5 8,564.0 10,261.1 6,233.9 7,626.2
80 50
GSKCH 4,885.8 5,339.0 1,078.6 1,195.9 838.8 941.2
Dec-15

May-16

Sep-16

Jan-17

Jun-17

Oct-17

Feb-18

Jul-18

Dec-18

HUL-GSKCH 43,457.3 49,460.5 9,642.6 11,457.0 7,072.7 8,567.3

HUL-GSKCH EPS 30.1 36.5
HUL (R.H.S.) GSKCH (R.H.S.) Nifty (L.H.S.)
Source: Company, ICICI Direct Research

Research Analyst
Earnings momentum to continue; recommend HOLD
Sanjay Manyal
sanjay.manyal@icicisecurities.com We believe the HUL-GSKCH merger is EPS accretive as GSKCH has a
higher gross margin of 67% against HUL’s 52% gross margin for FY18 in
Kapil Jagasia, CFA addition to synergy benefits on account of lower overhead expenditure,
kapil.jagasia@icicisecurities.com supply chain benefit resulting in 800-1000 bps expansion in margins. As
HUL & GSKCH stocks are fairly valued post the merger announcement,
we have a HOLD recommendation on HUL & GSK Consumer with a
revised target price of | 1855 and | 8145, respectively.

ICICI Securities Ltd | Retail Equity Research

 HUL-GSKCH synergy benefits
 The health food drinks (HFD) category has a national penetration of
25% and a much lower penetration of 14% in rural areas. With
HUL’s distribution reach of 7 million outlets and direct distribution of
3.5 million retail outlets against GSKCH’s retail outlets of 0.8 million,
we believe HUL-GSKCH would be able to penetrate deeper into rural
markets, thereby targeting double digit growth for Horlicks. HUL
would be able to market smaller packs & sachets of GSK
Consumer’s products more efficiently in rural markets

 The management has guided for 800-1000 bps margin expansion on

account of synergy benefits driven by lower overhead expenditure,
supply chain benefits and lower employee expenses resulting in
higher operating margins for HUL

 We believe HUL could enter into breakfast cereals segment (oats,

muesli, etc) and expand the existing biscuits portfolio of HUL-
GSKCH in the near future

 HUL would be in a strong position to strengthen its food &

refreshment (F&R) portfolio post the merger on the back of market
leadership of Horlicks in the HFD category. HUL’s F&R turnover
would reach | 10,700 crore post the merger

 GSKCH with its Horlicks and Boost brands had a strong presence in
the south & east markets but was a laggard in the north & west
regions. With HUL’s distribution reach, they may be able to unlock
north & west markets in future

 We believe HUL would employ premiumisation and uptrading

strategies for the HFD category as well, thereby shaping up its
financials

 HUL would pay royalty for Horlicks brand to Unilever Plc. However,
we are yet to get clarifications from the management on the exact
percentage of royalty to be paid

 The company will also get to amortise goodwill, the details of which
are unknown currently

ICICI Securities Ltd | Retail Equity Research Page 2

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong
Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is
defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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ANALYST CERTIFICATION
RATING RATIONALE
We /I, Sanjay Manyal, MBA (Finance) and Kapil Jagasia, CFA, MBA (Finance), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
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stocks according to their notional target price vs. current market price and then categorises them as Strong
Terms
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Buy:
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Hold:
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Sell:
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