Will Nestle India outperform Hindustan Unilever?

Will Nestle India outperform Hindustan Unilever?

Indian Market
by 5paisa Research Team Last Updated: 2022-09-26T18:07:34+05:30

FMCG products are one of the products which we recognize and use right from our childhood. In our childhood, we all used to love Maggi and Horlicks but do you know both products belong to which brand? 

Yes, you are right Maggi belongs to Nestle India whereas Horlicks belongs to the Hindustan Unilever brand. To date, Hindustan Unilever is said to be the number one FMCG brand in India but there are huge possibilities that Nestle India will outperform Hindustan Unilever in the long term.

Nestle is likely to increase production volume by promoting rural product penetration. It has only recently started reporting growth for different town classes, which continue to experience double-digit growth in contrast to the overall FMCG sector's decline because it has a low base and is currently gaining penetration.

On the other hand, Hindustan Unilever has led the way in recent years in promoting volume growth that is fueled by penetration thanks to its land use planning strategy and multi-brand architecture. Given that Hindustan Unilever has already attained high penetration for some of its products, premiumization is likely to be the driving force behind the company's future (material) growth. As consumers move away from the unorganized segment, Hindustan Unilever will also probably continue to experience penetration-led growth, though this benefit will be less for Hindustan Unilever than it is for Nestle India.

Out of the 7 categories where Nestle SA (the parent company) is present, Nestle India currently operates in 4. Because it can always import some of the parent company's brands to India when it thinks there is a market opportunity in a given category, Nestle India does not need to look for inorganic opportunities. Two of Nestle's international brands, Purina (pet care business) and Gerber (premium nutrition range for toddlers), has recently been launched in India.

On the other hand, Hindustan Unilever predominates in the (relevant) categories where its parent company, Unilever, is present. Additionally, Hindustan Unilever has been active in acquiring businesses in India in sectors such as ice cream (Aditya Milk), ayurvedic hair oil (Indulekha), female hygiene (VWash), and health food drinks (GSK Consumer - Horlicks, Boost, etc.).

Compared to its competitors, Nestle India has one of the lowest rural revenue saliences. Its reach into smaller cities and rural areas is constantly growing. By CY24, it aims to reach 120,000 villages, up from CY21's goal of 100,000. Additionally, it has already expanded its overall distribution reach from 4 million outlets in CY16 to 5 million outlets in CY21, and given the focus on rural areas, this expansion should continue.

Consumer preference for convenience has become increasingly apparent over the past few years, and this trend has accelerated since the introduction of COVID. This is a clear sign that Nestle India's sails as it relates to packaged food categories.

While Hindustan Unilever is present in Home care, Beauty and Personal care (BPC), and Foods, Nestle India is present in the food categories. D2C brands are more prevalent in BPC categories compared to foods categories for two reasons: a) BPC has higher gross margins, allowing D2C brands to invest in performance marketing; and b) consumers are more willing to try new things with BPC (multiple niche opportunities) than with foods (taste – it is difficult for consumers to change their taste preferences). Due to these factors, developing food D2C brands takes more time than developing food D2C brands. Nestle faces less threat from D2C brands given the inherent categories in which it operates than Hindustan Unilever, which is heavily represented in the BPC market.

Concluding to the topic, Nestle India has more potential to grow than Hindustan Unilever and there are chances that it will outperform Hindustan Unilever in long run.
 

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Our research team is composed of some highly qualified research professionals, their expertise range across sectors.

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Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.

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