MOSL: HINDUSTAN UNILEVER (Buy) - A healthy deal for HUVR-Significant medium-term benefits for growth and margins

HINDUSTAN UNILEVER: A healthy deal for HUVR; Significant medium-term benefits for growth and margins

(HUVR IN, Mkt Cap USD56.1b, CMP INR1826, TP INR2140, 17% Upside, Buy)

The Board of Directors of Hindustan Unilever Limited (HUVR) have approved a scheme of amalgamation between HUVR and GlaxoSmithKline Consumer Healthcare Limited (GSKCH) in an all-equity merger with 4.39 shares of HUVR being allotted for every share in GSKCH India, valuing the total business at INR317b, subject to requisite approvals from statutory authorities and shareholders.

• We believe HUVR has obtained a good deal, which is EPS accretive from the beginning. The company also benefits because (a) the merger is at a reasonable valuation, (b) GSKCH has agreed to a share-swap deal, (c) HUVR has not been saddled with the global business, and (d) being listed, transparency of GSKCH is extremely high. 
• While we continue to have our reservations on category growth in malt-based beverages (MFD), we appreciate what HUVR can bring to the table on premiumization, low unit packs, increased distribution and marketing strength.
• Planned cost savings even on a highly profitable business is massive at 800-1,000bp from wide-ranging factors like materials and packaging, advertising and infrastructure costs.
• The deal also pushes HUVR among the market leaders in the only key category where it did not have market leadership (Food and Refreshments) unlike Beauty & Personal Care and Home Care where it is the dominant player.
• Even in its existing Foods and Refreshment (F&R) portfolio with high penetration levels (especially in Tea), the company has demonstrated ~10% CAGR topline growth and ~500bp margin improvement in the past 10 years.