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8/14/2019 Hll vs Itc Big Fight 300805 Sski
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1
Hindustan Lever v/s ITC
Nikhil Vora(M) +91 –9821132471 / (Dir) [email protected]
The Big Fight
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2
HLL v/s ITC
The Big Fight
HLL: Reaching two third of Indianhouseholds, best of the brands in its
kitty, a venerable position among
competitors
ITC: Reaching depth and breadth of thenation, but under constant litigation
threat and desperately looking for
newer avenues
Circa 2000…
Who would you bet on?
40
60
80
100
120
FY96 FY97 FY98 FY99 FY00
Gross Revenues
HLL ITC
HLL = 1.4x ITC
(Rs m)
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3
HLL v/s ITC
The Big Fight
On former
But, we did not…
Who would you bet on?
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4
HLL v/s ITC
The Big Fight
And we have been proved right…
HLL: Core business stagnating, intense
competitive pressure and failure to
identify growth drivers
ITC: No more just a cigarettes business,
limited competition, growth derived
from multiple fronts
Today…Gross Revenues
70
90
110
130
150
FY01 FY02 FY03 FY04 FY05
HLL ITCITC = 1.2x HLL
(Rs bn)
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HLL v/s ITC
The Big Fight
Why did we bet on ITC?
ITC
Growth cycle3Cs impact
Calling the shotsNot a single brand has ever
seen a price decline
Multiple growth drivers• Core business of cigarettes
- far from saturation point• All businesses highly
scalable
• As businesses scale up,
profitability to increase
HLL
Deflationary cycleMargin myopia
A mere price takerSeen in recent price wars
Absence of growth drivers
• 50% of revenues fromhighly stagnated markets
• Personal product - the
only growth driver
• Virtual absence in foods
Business Model
Ability to call shots
Growth drivers
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HLL v/s ITC
The Big Fight
Ability to call shots – the key strength
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
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HLL v/s ITC
The Big Fight
HLL – A price taker?
Competition a nuisance value – space too cluttered with small players
Have not only eaten market share, but even stripped HLL’s pricing power
Soaps
HLL
Godrej
Reckitt
Nirma
Value Market share
380bps drop in 5 yrs
2005
HLL
Nirma
P&GHenkel
Ghadi
Value Market share
38.6%
2000
HLL
Nirma
P&G
Henkel
Ghadi
Value Market share
200bps drop in 5 yrs
2005
Detergents
Godrej
Reckitt
Nirma
Value Market share
59.7%
2000
HLL
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HLL v/s ITC
The Big Fight
HLL – A price taker?
Oral Care
Colgate
HLL
Value Market share
36.4%
2000
Colgate
Dabur
Anchor
Amar
Value Market share
380bps drop in 5 yrs
HLL
2005
HLL
P&G
Cavinkare
Dabur
Value Market share
70%
2000
P&G
Dabur
Value Market share
2100bps drop in 5 yrs
HLL
2005
Hair Wash
HLL / ITC
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HLL v/s ITC
The Big Fight
HLL – a mere price taker
High price elasticity = low brand relevance
Price = functional benefit
Only option - follow competitive pricing to protect volume share
Detergents
5.0%
1.2%
-0.5%
0.5%
-3.1% -2.8%-3.4%
-1.2%
4.3%
6.7%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
FY01 FY02 FY03 FY04 FY05
Growth in Realization / tonne Volume Growth
HLL / ITC
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HLL v/s ITC
The Big Fight
ITC – a price maker?
Where is the competition, except from ‘bidis’?
High brand loyalty: low price elasticity
Consistent price increase with no switchovers seen
Not a single brand has ever seen a price decline
5.28.40.580.450.26Net Cigarette price (Rs/stick)
7.27.80.850.600.40Excise paid (Rs/stick)
6.48.01.431.050.66Unit realization (Rs/stick)
0.573.369,99866,14550,609Cigarette volumes (m)
CAGR - 5 years(%)
CAGR - 10years (%)
FY05FY00FY95ITC
HLL / ITC
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HLL v/s ITC
The Big Fight
Cash generation ability
HLL: Core business - receding 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
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HLL v/s ITC
The Big Fight
Appetite and willingness to take risk
Has not made successful entry in
any newer business
Quick returns or move out – not
willing to add businesses making
loss in short run
Moved out of businesses like
Bakery, Confectionery, RTE,
Healthcare, Services, etc within
two years of launch
Willingness and appetite to forego
short-term profits for long-term
gains
Entered capital intensive, low
margin and long gestation
businesses (e-Choupal, Agri,
Hotels)
Market leader or significantplayer in the businesses that HLL
exited from
HLL: Play in known territory ITC: play where others fear to tread
HLL v/s ITC
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HLL v/s ITC
The Big Fight
HLL – dearth of innovation
Product portfolio unchanged in the past five years
1960
1970
1980
1990
2000
2010
Rin Bar FAL SkinCream
Close up Clinic Plus Vim Bar AnnapurnaSalt
Atta Max AyushHerbal
KissanBistix
KissanSoupy
Snax
Early exit – did not have patience to stay
invested
Sangam Pure ItDirect
?
Y e a r s
HLL v/s ITC
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14
HLL v/s ITC
The Big Fight
ITC – transition to a consumer play
Dependence on cigarettes business coming down
Sales – Rs135.9bn
Cigarettes – 70%
1999 2000 2001 2002 2003 2004 2005
Sales – Rs79.5bn
Entry in to Retailing
Launch of e-choupal
Sales – Rs75.8bn
Cigarettes 87%
Sales – Rs86.8bn
Hotel business re-branding
Entry in to foods business
Sales – Rs98.4bn
Launch of Candyman
Aashirvaad Atta
Sales – Rs110.2bn
Launch of Sunfeast
Sales – Rs118.2bn
EOU - Packaging
E-choupal:Rs3.5bn
Choupal Sagar: A rural
retail mall
Hotels: Rs4bn,
acquired Ansal Hotels
Foods: Rs3.6bn
Atta: Mkt Leader, 36%
share. 2nd largest in
confectionery
7% share of the biscuits
market
HLL v/s ITC
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HLL v/s ITC
The Big Fight
Redirecting funds towards future growth drivers
4216137(74)185RoCE (%)
53,878321426523Capital Employed (%)
2018525(35)23EBIT %25,9681144(8)89% of EBIT
143,19111123470Revenues (%)
Total(Rs m)
Paper/Pack
Agro-bizHotelsNon-cig(FMCG)
Cigarettes
HLL: Continued dependence on the core business
ITC: Funds redirected towards long gestation businesses
* Unallocated Capital employed distributed in the proportion of EBIT %
83.21.3NA201.1105.6106.2RoCE (%)
20,92724.7(1.8)5.736.634.9Capital Employed (%)*
200.4(23.1)2032.717.3EBIT %
17,4180.4(5.0)13.746.444.5% of EBIT
100,60715.43.711.924.644.6Revenues (%)
Total(Rs m)
OthersFoods & icecream
BeveragesPersonalproducts
Soaps &detergents
HLL v/s ITC
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16
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 Collins and Jerry Porras in ‘Built to Last’
HLL v/s ITC
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HLL v/s ITC
The Big Fight
Ability to evolve
Evolution – the key to growth
2000
HLL ITC Dabur Marico
Soaps & detergents – 40%
Personal Products - 17%
Cigarettes – 87%
Absence in other
FMCG space
100% herbal,
traditional business
Edible and hair oil
100%
Focused consumer play– power branding
A pureconsumer play
Consumer andhealth care around
herbal proposition
Consumer careand healthcare
Attempted but failed –
Biscuits, Ayush,
Snoupy Snax,Confectioneries
Biscuits,
Confectioneries,
RTE, Retailing,other FMCG
Fruit Juice, skin care,
International
business, toothpaste,
Skin care – products
Skin care – services
Cosmetics
International
business
Soaps & detergents – 45%
Personal products–26%
Shift partly owing to
hiving off of businesses
Cigarettes
contribution
down to 70%
New ventures
accounting
for over 30%
NPD
contributing to 18%
Evolution
New
businesses
2005
0% 11% 15% 10%5 years
CAGR
HLL v/s ITC
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HLL v/s ITC
The Big Fight
"Unless you try to do something beyond what you havealready mastered, you will never grow“
Ralph Waldo Emerson
HLL v/s ITC
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19
The Big Fight
HLL - what will drive growth?
Scope for category to grow?
Incremental scope for HLL within the category?
84.982.291.235Tea & coffee
43.632.369.820Oral care
23.416.340.110Hair wash
24.819.836.615Skin care
84.982.989.645Fabric wash
92.890.797.655Personal wash
TotalPenetration
RuralPenetration
UrbanPenetration
Market SizeCategories
37
33
47
60
38
56
HLL' share
Tea & coffee
Oral care
Hair wash
Skin care
Fabric wash
Personal wash
CategoriesMarket leadership in 5 of
the 6 categories
HLL: Rs100bn company in
Rs400bn business
HLL v/s ITC
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20
The Big Fight
HLL - what will drive growth?
Only way to grow – more share of wallets,
penetration more than 85%
Gain market share from unorganised players
Far from saturation - penetration below 50%
PCC in India 1/10th of PCC in comparable countries;but growing clutter
Rs1500bn business, just 10% branded, growing atover 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
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The Big Fight
HLL – an unimpressive mix
Soaps &Detergents the
least lucrative
business
Too many cash
cows and few
stars
Insignificant
presence in
most lucrativefoods business
With this product portfolio, HLL can at best expect low double digit growth
Low Medium High
L o w
M e d i u m
H i g
h
Soaps
Detergents
Oral care
Skin Care
Hair Wash
Tea / Coffee
Processed Foods
Incremental scope for HLL
M
a r k e t A t t r a c t i v e n e s
s
HLL v/s ITC
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22
The Big Fight
Broadbased growth potential
ITC businesses - far from saturationIndia
• Cigarettes consumption - 14% of the total tobacco consumption
• Per capita consumption – 141 sticks
Globally• Cigarettes consumption - 85% globally and 65% in comparable
countries
• Per capita consumption – 1190 sticks
Market sans competition
• India – 0.35% of the global tourism, ARR much below global standards
• Growing tourist arrivals, increasing ARR – shrinking gap between
demand and supply of rooms• Eyeing to be the largest player - organic and inorganic growth plans
on cards
At a GDP growth over 6%, demand for rooms to double in next
five years
Hotels –significant
‘room’ for
growth
Cigarettes –
still gives kick
HLL v/s ITC
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The Big Fight
Broadbased growth potential
ITC businesses - far from saturation
• Paperboard consumption – 0.75kg, 1/7th of the global average
• Value added coated board business – growing at 20%, ITC is market
leader• Highly capital intensive business, low competition in the long run
ITC – Rs15bn investment in next four years, fast paced business
scale up
• Increasing out of home eating and need for convenience
• Highly fragmented and room for ‘Me Too’
• Growing at over 20%
• Low margins – small players to move out in long run
ITC – Rs3.6bn turnover in two years, doubling every year, 75
products across 4 categories
Foods – room
for ‘Me Too’
Paperboardand specialty
paper
HLL v/s ITC
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24
The Big Fight
ITC - a heady mix
Each business – a potential ITC
L o w
Low Medium High
M e d i u m
H i g
h
Cigarettes Processed Foods
Hotels
Other FMCG Paper
Agri business
M a r
k e t A
t t r
a c
t i v
e n
e s s
Incremental scope for ITC
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25
The Big Fight
Inorganic growth option
HLL
• Low entry barriers
• Only available option is buy smallbrands
Unimpressive track record - Modern
Foods: bought at Rs1.5bn, size today
< Rs500m
• Best Foods: acquired brands Knorr,
Captain Cook. Captain Cook
discontinued, Knorr’s presence
insignificant
ITC
• High business barriers
• ITC, a mortal competitive fearRecent acquisitions
• Wimco (safety matches) – competition
killed
• Ansal Hotels – added assets
• BILT (Paper) – added capacity
Scouting for more acquisitions in FMCG,
greetings, paper and hotels
Too less value addition and
premium valuations
Buying asset or removing
competition: at fair valuations
HLL v/s ITC
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26
The Big Fight
Can HLL still displace ITC? We doubt…
The two companies have swapped places from wherethey were in 2000
ITC deriving growth on multiple fronts
HLL faltering to identify a growth driver
The differentiators have put the two in contrasting business cycles
HLL v/s ITC
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The Big Fight
HLL – a deflationary model
Unless HLL does something drastically different, to remain caught in the cycle
High profits luring
competition to
enter and playprice game
Low ability to
call shots
Low incremental
cash generation
from core business,
low risk taking
appetite
Absence of scalable
growth drivers
Increased
dependence
on core
business
Margin myopia
No new
business entry
Stagnant
revenues
HLL v/s ITC
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The Big Fight
ITC – a prosperity model
3C impact (Cigarettes, Cash, Consumer)
Increasing profits
with growing scale
High cash
generation from
core business,appetite to
redirect funds
Long gestation
business entry
Lower
competitive
pressure
Reduced
dependence
on cigarettes
business
High pricing
power
Higher revenues,
but lower profits
in initial years
Multiple growth
drivers
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The Big Fight
On a different growth trajectory
HLL: gradual growth and constrained margins
ITC: multiple growth drivers and profits with scale
Net Profit
5
10
15
20
25
30
35
FY04 FY05 FY06E FY07E FY08E
R s b n
HLL ITC
50.0
70.0
90.0
110.0
130.0
150.0
170.0
190.0
210.0
FY04 FY05 FY06E FY07E FY08E
R s b n
HLL ITC
Gross Sales
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The Big Fight
HLL – gentle climb over the hill
Capitalising on improving macro dynamics; back to basics approach
3.4
72.1
60.5
17.2
9.3
3.0
17.8
22.7
20.5
7.1
2,201
15,539
8
115,803
CY06E
3.83.43.13.4Dividend yield (%)
72.962.35559.8RoNW (%)
62.343.333.646.9RoCE (%)
14.919.318.918.8Price/ BV(x)
10.78.38.58.5Book Value (Rs/ share)
2.83.23.53.4EV/ sales(x)
15.620.824.217.5EV/ EBITDA (x)
19.927.329.419.9PER (x)
13.77.7(32.4)0.1EPS growth (%)
8.05.95.48.1EPS (Rs)
2,2012,2012,2012,201Share in issue (m)
17,66612,89411,97417,718PAT
78(2)2% change
123,847107,16599,269101,384Net sales
CY07ECY05ECY04CY03Year to December (Rs m)
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The Big Fight
ITC – growth from multiple fronts
Robust core business, rapidly growing non-core business
2.6
27
26
4.0
437
3.9
10.3
16.3
19.9
106.7
249
26,407
15
100,982
FY07E
2.9
28
27
3.4
517
3.3
8.2
13.2
22.6
130.8
249
32,379
14
114,885
FY08E
1.7
26
25
4.6
376
4.6
12.6
19.5
19.8
88.9
249
22,016
15
87,914
FY06E
1.81.2Dividend yield (%)
2627RoNW (%)
2626RoCE (%)
5.36.7Price/ BV(x)
329260Book Value (Rs/ share)
5.46.5EV/ sales(x)
14.717.7EV/ EBITDA (x)
23.426.9PER (x)
15.316.2EPS growth (%)
74.264.4EPS (Rs)
249249Share in issue (m)
18,37115,929PAT
1810% change
76,39564,704Net sales
FY05FY04Year to March 31 (Rs m)
HLL v/s ITC
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The Big Fight
Value the trajectory
ITC ahead on business performance, but disparate valuations
0
40
80
120
160
Sales Turnover EBITDA Net Profit 3 yr Revenue CAGR 3 yr PAT CAGR
ITC HLL
PER (x)
0
5
10
15
20
25
ITC HLL
EV/EBITDA (x) EV/Gross sales (x)
Bigger scale
Better growth
Yet… lowerValuations!
HLL v/s ITC
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The Big Fight
Valuation gap bridging
As the consumer portfolio increases, ITC to get consumer valuations
10.0
22.0
34.0
46.0
58.0
70.0
M a r - 9 5
S e p - 9 5
M a r - 9 6
S e p - 9 6
M a r - 9 7
S e p - 9 7
M a r - 9 8
S e p - 9 8
M a r - 9 9
S e p - 9 9
M a r - 0 0
S e p - 0 0
M a r - 0 1
S e p - 0 1
M a r - 0 2
S e p - 0 2
M a r - 0 3
S e p - 0 3
M a r - 0 4
S e p - 0 4
M a r - 0 5
HLL - PE ITC - PE
HLL v/s ITC
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The Big Fight
We still bet on ITC
0
160
320
480
640
M a y - 0 0
S e p - 0 0
J a n - 0 1
M a y - 0 1
S e p - 0 1
J a n - 0 2
M a y - 0 2
S e p - 0 2
J a n - 0 3
M a y - 0 3
S e p - 0 3
J a n - 0 4
M a y - 0 4
S e p - 0 4
J a n - 0 5
M a y - 0 5
HLL - Market cap ITC - Market cap(Rs. Mn)
HLL v/s ITC
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The Big Fight
THANK YOU
This document has been prepared by S.S. Kantilal Ishwarlal Securities Pvt. 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 timesolicit from, or perform investment banking, or other services for, any company mentioned in this document.
Nikhil Vora / Bhushan GajariaSSKI Securities
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