hll vs itc big fight 300805 sski

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



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)



3

HLL v/s ITC

The Big Fight

On former

But, we did not…

Who would you bet on?



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


HLL ITCITC = 1.2x HLL

(Rs bn)



5

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



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



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


2005

Detergents

Godrej

Reckitt

Nirma

Value Market share

59.7%

2000

HLL



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


HLL

2005

HLL

P&G

Cavinkare

Dabur

Value Market share

70%

2000

P&G

Dabur

Value Market share


HLL

2005

Hair Wash

HLL / ITC



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%


Growth in Realization / tonne Volume Growth

HLL / ITC



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



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



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



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



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



15

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



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



17

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



18

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



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



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



21

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



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



23

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



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

HLL v/s ITC



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



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



27

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



28

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

HLL v/s ITC



29

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

HLL v/s ITC



30

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)

HLL v/s ITC



31

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



32

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



33

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



34

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



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

(M) +91 –9821132471 / (Dir) +91-22-56383308

<[email protected]> / <[email protected]>

hll vs itc big fight 300805 sski

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