How should one interpret the acquisition of Indulekha by HUL?

Unilever has been making global acquisitions in the natural products area, and HUL may bring some of those brands into India. Photo: Pradeep Gaur/Mint

How should one interpret the acquisition of a small regional brand by Hindustan Unilever Ltd (HUL)? Last week, it said it will pay Rs.330 crore to acquire the Indulekha and Vayodha ayurvedic personal care brands from the Mosons Group.

This amount will be supplemented with a payment of 10% of annual revenues annually for five years starting FY18. At an assumed annual sales growth of 20%, the additional consideration could amount to Rs.130 crore.

First, the consideration is 3.3 times sales but increases if you take into account the additional consideration. The brand’s profitability is good at 30%, which is higher than the segment margin earned by HUL’s personal care business in the September quarter. Although the price is not cheap, the partial deferral is a sweetener. Also, it’s a relatively new brand (launched in 2009), offering scope for growth.

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That’s where the next question arises. What does HUL intend to do with this brand? It recently revived its Lever Ayush brand, which is now being sold through e-commerce websites. The new acquisition fits into its Premium Naturals segment, says the company, with an opportunity in leveraging its naturals and therapeutic positioning.

On 7 December, HUL’s chief executive officer and managing director Sanjiv Mehta said the firm was seeing a shift towards natural products and plans to strengthen its presence. Reviving Ayush was one step and it plans to make bolt-on acquisitions. Indulekha fits this description. He also mentioned Unilever has been making global acquisitions in this area, and HUL may bring some of those brands into India.

The tricky part for any traditional personal care company that is seeking to grow in the naturals category is to avoid cannibalization and instead get new customers into the fold. Premium products and alternative sales channels is one option. But that risk may be an acceptable one, as the alternative could be losing customers to smaller brands. It also helps HUL’s case that the parent company too is convinced about the opportunity in this segment.
[“source -livemint”]

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