Shares of Hindustan Unilever Ltd. hit a 52-week high as it entered the health and wellness sector with the acquisition of two companies, OZiva and Wellbeing Nutrition, for a total of Rs 334 crore.
The sector has a market potential of Rs 30,000 crore, according to the company's investor presentation, which it termed a "fast-evolving growth segment."
Both companies will continue to be operated by their respective management teams, with HUL representatives on their boards. The transactions will be completed in one to three months.
Shares of Hindustan Unilever gained as much as 1.34% to Rs 2,741.6 apiece, a fresh 52-week high. Of the 43 analysts tracking the company, 30 maintain 'buy', 10 suggest 'hold' and three recommend 'sell'. The return potential of the stock implies a upside of 5.2%.
Here's what brokerages made of HUL's moves:
Nomura
Maintains 'buy' rating at a target price of Rs 3,175, implying a potential upside of 17.3%.
Within health and wellbeing, HUL will focus on ramping up the portfolio across high-growth spaces such as sleep and stress solutions, women's health, gut health, beauty from within, and plant-based offerings.
Management expects both these businesses to accelerate growth and balance margins in the long run as both OZiva and Wellbeing Nutrition have gross profit margins of over 55%+ and will be margin-accretive for HUL on the gross level. However, on the operating margin level it is still in the investment stage.
Investments are a good strategic fit for HUL, as these can help leverage its inherent capabilities and borrow learnings from the parent company to tap the domestic market.
The investments are a step forward in HUL's strategic focus to enter the fast growing demand spaces to cater to evolving consumer trends.
Key risk: slow volume growth.
Systematix
Maintains 'buy' rating at a target price of Rs 2,855, implying a potential upside of 5.7%.
Albeit the current size is quite small, we view these transactions as HUL's official entry into the fast-growing health and wellbeing market which is currently at an inflection point and currently has a predominantly digital distribution presence.
Expect a few more acquisitions in this space in addition to the launch of a few products from Unilever's global health & wellness portfolio.
Although the potential is quite large, we do not yet see a clear right to win for HUL in this category given the category itself is nascent and the entire global portfolio has also been acquired in the past four years.
Given the aggressive growth investments, the business should be dilutive on the Ebitda margin front for the foreseeable future despite it having 55% plus gross margins (48% for HUL).
Jefferies
Maintains 'buy' rating.
While acquisitions are insignificant in the context of HUL's current revenue and profit base, we like management's growth mindset and focus on identifying future consumer needs and trends.
HUL also intends to bring global brands (seven acquired by parent, one billion euros in revenue) in coming years and further mergers and acquisitions are also not ruled out.
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