Unilver places a $5.4bn bet on India's consumer space
Unilever’s $5.4 billion commitment to India—the second-largest foreign direct investment in recent times after BP’s $7 billion—is evidence of the multinational’s confidence in the Indian market as also in its ability to be able to cash in on this potential opportunity. At a time when managements can barely see beyond the next three months, the global FMCG major seems to be looking far out into the future in a vision that’s refreshing. Both Procter & Gamble and Nestle, for instance, are sitting on mounds of cash—$5.8 billion and $10.3 billion, respectively—but neither has anywhere as meaningful a presence in India as Unilever does despite having been around for a good many years now.
While Unilever may, no doubt, have enjoyed a first-mover advantage, it was also smart enough to have built the redoubtable reach it has today on the back of its strong portfolio of household products. Moreover, it created products for the Indian consumer including a Wheel and a Fair & Lovely, both R1,500-crore-plus brands. It’s not that the MNC hasn’t had its share of setbacks or hasn’t made mistakes—the foods business, for instance, hasn’t really taken off as expected. But it’s always fought back; the comeback with Wheel to fight Karsanbhai Patel’s Nirma, the shift in focus from margins to volumes, the move into packaged foods, success of Dove in the value-add space and the resurrection of Rin, a dying brand, is proof of how well it knows and plays the Indian consumer space. No retailer, whether a kirana or an organised player, can afford not to stock the Unilever basket of brands, so dominant is its presence.
Having cornered an enviable share of the Indian market on the back of a strong distribution network and having built a R26,000 crore business, it’s not surprising that the MNC is so bullish on the Indian consumer space, it is willing to back it with a $5.4 billion commitment. The open offer announced on Tuesday targets 22.52% of the company’s equity and could take Unilever’s stake in the Indian subsidiary to 75% from the current 52.48%. More importantly, the R600 per share being offered values the stock at a one-year forward price-earnings multiple of roughly 35 times—much above the historical multiple of between 25 and 30 times. Even before the 17% rally on Tuesday, which took the share price to its lifetime high, shareholders would have been loath to part ways with the stock—between March 1991 and now, it has gained a stupendous 5,158% compared with the Sensex’s 1,168%, overshadowed by few others when it came to paying dividends. The average payout over the last 15 years has been upwards of 80%.The government, though, will pray the open offer turns out to be a success given that $5.4 billion can go a long way in helping finance the current account deficit (CAD). If the FY14 CAD number is the $100 billion the PMEAC projects, this leaves India with a shortfall of $20-25 billion that needs to be financed with ‘hot money’—that’s largely trade credit and banking capital. Unilever’s $5.4 billion, viewed from this perspective, takes away a large part of the tail risk as far as the rupee is concerned.