What Unilever’s latest restructuring means for HUL investors

Unilever to separate ice creams business

HUL’s parent company Unilever has decided to split its global ice creams into a separate entity. The likely route is a demerger but is not final and other options are still on the table. That could mean a sale even if it gets an attractive offer.

What does this mean for HUL? Ice creams is a part of the nutrition segment, with the main brand being Kwality Walls with others such as Cornetto and Magnum giving it company. The business’ turnover is not disclosed but news reports have pegged it at 3 percent of turnover in FY23. Kwality Walls has a brand turnover in the Rs 1000-2000 crore range.

In an earlier disposal of a business when Unilever sold its tea business, HUL actually retained it. However, in ice creams, one can expect the Indian business to also get transferred. The business itself is relatively small and may not be a significant contributor to profitability either, given the price-competitive ice creams market. Also, Unilever would want its global businesses to be more closely aligned with its own strategy and structure, under the new management.

One possibility is that HUL also demerges and lists the ice creams business, which is a less likely option. Another is that HUL runs the business as it is. A third possibility is HUL runs it as a cost-plus business, supplying to a subsidiary of the global ice creams business that will in turn do the marketing. Lastly, an option is for the ice creams business to be transferred to a separate company owned by the global ice creams entity but this will entail a consideration payable to HUL.

Any arrangement may also be an interim one till Unilever finds a buyer for the business. For HUL, the move will mean a small decline in revenue but a likely improvement in profitability and the possibility of a cash inflow when the business is sold. That money can either be paid out as dividend or used for acquisitions.

Related stories

Ravi Ananthanarayanan

Deputy Executive Editor|Moneycontrol

• 
  Moneycontrol Pro Panorama | Mind the gap: the main lesson from MF stress tests
• 
  Surprise slump in iron ore prices poses risk for India’s steel producers
• 
  Why the Novelis IPO news did little to lift investor sentiment for Hindalco

A bigger move to watch for is Unilever’s other announcement, the launch of a productivity improvement programme. It wants to save around £800 million (Rs 8450 crore) in the next three years. As part of this programme that aims for a leaner organisation and 7500 office jobs will be eliminated globally.

Unilever has also said that both the ice cream sale and the productivity programme will lead to higher margins. It says it aims to deliver mid-single digit underlying sales growth, up from the 3-5 percent level and modest margin improvement. HUL’s investors too can expect some support for margins from the separation, although the near term may see restructuring-related costs.

When the productivity improvement is implemented in India, it too could add to margins or provide additional headroom to spend more on advertising and promotion to drive growth. The listed FMCG players have been finding volume growth to be a bother, that they attribute to a slower than expected recovery in demand, especially rural demand.

That HUL’s shares are down today and were down yesterday as well, in line with the broad market movement, indicates that shareholders don’t attach too much importance to the sale of the ice creams business. A FT analysis of Unilever’s move also says that the sale is not enough and what is needed is for the foods and non-foods businesses to also be separated. However, what Unilever may try before that is to execute on its internal restructuring efforts and see if a faster growing and leaner company can satisfy investors.

A parent company that is hungrier for sales growth and is seeking to improve productivity augurs well for its subsidiary HUL too. Given its size and importance for the parent, it is likely to play a key role in this transition. While it is already punching above its weight in terms of contribution to profitability, its sales growth has been a bit underwhelming of late. A sharper focus and higher growth is also what the doctor has ordered for HUL.