Monday, May 27, 2013

Unilever Takes the Spotlight in Emerging Markets

From the Motley Fool, dated May 13, 2013

In the recent round of earnings, the leading fast moving consumer goods (FMCG) firms reported modest to flat growth. Procter & Gamble (NYSE: PG) did not report any growth in its biggest business unit. The subsequent fall in its share prices could provide an entry point for safe investors. While the company, under pressure from shareholders, is focusing on trimming down costs by cutting $10 billion through 2016, its rival Unilever (NYSE: UL) is gearing up to expand in emerging markets and is betting billions on India. 

According to its earnings release, Procter & Gamble's net income rose 6% to $2.57 billion from $2.41 billion in the same quarter last year, while net revenue rose 2% to $20.59 billion from $20.19 billion. Its smaller oral care-focused rival Colgate-Palmolive Company (NYSE: CL)reported a 22% drop in quarterly earnings to $460 million from $593 million a year ago, despite the 2.5% increase in net sales to $4.31 billion from $4.20 billion. Meanwhile, Unilever's revenues grew by just 0.2% to $15.92 billion for the three months ending March.
Price increases and revenue growth
Procter & Gamble increased prices in its beauty and grooming segment by 1% and 3%, respectively, but net sales fell by 2% in each of these units to $4.76 billion and $1.93 billion respectively. Prices in the health care unit increased by just 1%, and the unit reported the strongest growth figures. Prices in fabric and home care did not increase, but this segment, which is the company's biggest source of revenue, failed to show any growth in terms of revenues. However, it did report a 3% volume growth. Baby and family care’s net sales rose 3% to $4.27 billion as prices were increased by 2%.
Procter & Gamble’s segments sales table:
SALES (in billions)
Health Care
Fabric and Home Care
Baby and Family care
Meanwhile, Unilever increased prices in personal care and home care units by 2.6% and 3.9%, respectively, while both segments reported strong growth. Net sales in the food segment fell by 5.4% to $4.41 billion as prices increased by 0.9%. In refreshments, prices rose 3.9% and sales fell by 0.9% to $2.75 billion.
Unilever’s segments sales table:
SALES (in billions)
Personal Care
Home Care
Growth in emerging markets
Unilever recorded $6.80 billion in revenues from developed markets and $9.24 billion from emerging economies. The latter continue to drive the company’s growth in the current quarter, as in the previous seven, Unilever achieved double digit growth numbers in the emerging markets -- this time it was 10.4%.
Procter & Gamble is currently more focused on cutting down costs than on growing in emerging markets, despite realized growth in these markets, particularly in Brazil and India. The growth numbers mentioned above in the health care and baby care segments were caused by strong growth in developing markets. 
Colgate Palmolive also posted good numbers for the Asia and Africa regions, where its sales rose 8.5% to $248 million, which represents the largest percentage increase in sales in all of its geographic markets.
Betting on India
Hindustan Unilever has delivered stellar performance by posting a 15% increase in net profits to $145.1 million, far above the market’s expectations. Hindustan Unilever operates as a separate unit of Unilever and is the market leader in India’s enormous FMCG sector. India is home to 1.3 billion people, which makes it the second most populous country of the world. With a rising middle class, the market for consumer goods is $42 billion. When it comes to this country, Hindustan Unilever is a much bigger player than Procter & Gamble. The latter has around 2.5 million sales outlets in India, while the former boasts more than 6 million.
Unilever, which currently has 52.5% shares of Hindustan Unilever, now aims to buy further shares by spending as much as $5.4 billion in what could be the biggest ever acquisition by a multinational company in India. By doing so, Unilever will increase its stake to 75%; this is the maximum allowed under Indian laws. 
Unilever is betting billions on Hindustan Unilever, and I believe that it is a safe bet. Although there are dozens of smaller rivals in India, but Hindustan Unilever is better positioned. It has been operating in the country for more than a century -- i.e., before the creation of India. It knows the market better than its rivals through years and years of successful operations in both rural and urban parts of the country. Its dominance is well established. The company's growth numbers are often taken as a reflection of the growth of India's consumer goods sector.  
Performance summary
In the last six months, Unilever has outperformed Procter & Gamble and Colgate. Both Unilever and Procter & Gamble have yields of more than 3%, but Procter & Gamble is relatively cheaper with a lower price-earnings ratio. Procter & Gamble has a rich history of regularly increasing its dividends, which has recently been raised by 7% to $0.6015 for the quarter. The company’s stock took a hit after it released its earnings; its shares dropped by 5.9%. FMCG companies are generally considered safe investments for those looking to add low-risk-modest-returns firms to their portfolio; therefore the current dip presents a buying opportunity. On the other hand, Colgate-Palmolive generates a significantly higher return on assets (ROA) and equity (ROE) than its rivals, but despite its decline, the shares are still considerably more expensive than Procter & Gamble's
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article