According to analysts at PhillipCapital, “HUL is positioned well to acquire brands that have hit a wall, despite being present in categories that are fast growing, although under-penetrated and niche.”
The urban penetration of this category is sub-8 per cent. Analysts at Edelweiss Securities also echo similar views. “We have no doubts about HUL’s ability to undertake market development,” they said in a note.
The strong distribution network of HUL (9 million outlets), clear focus, and the company's cost efficiency are likely to help the high-margin VWash brand scale higher (and deliver high growth) in the medium to long term, as observed in case of Indulekha — a premium hair oil brand.
After acquiring it in 2016, Indulekha’s turnover jumped 4x to Rs 400 crore in less than five years; its earnings before interest, tax, depreciation and amortisation margin, too, expanded sharply to over 50 per cent in 2018-19, from 30 per cent, according to PhillipCapital.
The financial details of the deal weren't disclosed, but HUL’s management expects double-digit growth of the VWash brand to continue. It also believes that the launch of low-unit or small packages will help increase the overall reach of the brand. The overall hygiene habits in the country, too, are expected to improve, in light of the current contagion.
The VWash deal - expected to fructify in a few months, along with GlaxoSmithKline Consumer Healthcare (GSK Consumer) — will strengthen HUL’s presence in the chemist channel.
This will support the company’s existing portfolio as well. HUL recently got all the approvals for its GSK Consumer acquisition; this is expected to be earnings accretive.
How the new category shapes up with HUL’s overall efficiency and reach will be keenly watched. The stock is currently trading at 50x its 2020-21 estimated earnings.