St theorises on Hindustan Unilever oral care sale

Hindustan Unilever (HUL) may be looking to sell its oral care business in India, says the buzz on the street.

In India, the group’s oral care business is led by the toothpaste brands Close-Up and Pepsodent.

An analyst with a foreign brokerage said only one brand — Pepsodent — may be put on the block. “There has been talk for a while now that HUL may sell both its brands. My guess is it may be only Pepsodent, which is lagging Close-Up. Both brands work at around 25-30% profit-before -tax margin, so HUL can get good value out of it,” he said.

Manoj Menon and Amrita Basu of Kotak Institutional Equities said Colgate could be an interested party.

“Colgate dominates the white toothpaste segment (around 65% market share) whereas HUL is the leader (around 70%) in gel segment. We believe that HUL’s oral care portfolio will be a great strategic fit for Colgate India as, (1) it takes Colgate to a combined market share of about 80%, (2) get rid of a major competitor and (3) opportunity to rationalise adspends (maintenance adspends for Colgate — at 15% of sales — one of the highest in the FMCG industry),” Menon and Basu wrote on Tuesday.

An HUL spokesperson, however, denied any such move.
“There is no factual basis to this speculation. It is grossly incorrect. Oral care is an integral part of our FMCG business and we are fully committed to growing it,” the spokesperson said.

But speculation is rife.  That’s in part because HUL’s brands are flagging.

Another analyst with a domestic brokerage, who also wished not to be named, said a quarter of the oral care segment sales is in the sub-Rs 30 category where HUL does not have a presence.

“So they are not participating where the volumes are. Under current circumstances, HUL can continue as it is for some time but their competitive position is worsening. Unless they invest serious money, it’s not going to work. But if they get an excellent multiple, say 25 times earnings. something like Rs 3,000 crore, it makes sense to sell,” the analyst said.

A third analyst, also preferring anonymity, said there was a structural problem with Pepsodent’s brand equity. “Pepsodent competes with Colgate Dental Cream, which is a great umbrella brand. But Pepsodent as a standalone brand does not have the same traction since HUL underinvested in it,” he said.

The  overall toothpastes market is dominated by Colgate with over 50% share.  HUL follows with about 26% and Dabur about 10%.

HUL has been losing share in toothpastes and face care — two significantly large categories that contribute over 50% to its personal products business — as also in detergents, soaps and shampoos due to aggressive competition.

In the last three months, it has had to slash Pepsodent prices by 6-7% to improve market share.

According to an analyst, HUL has lost market share of 300 basis points year on year and 100 basis points quarter on quarter in the oral care segment to 26% in the December quarter.  Other suitors being talked about are Cavinkare and Wipro.

“For Cavinkare, it makes strategic sense as they are not into oral care business at all, so it can be a good buy,” said the analyst. Ramesh Viswanathan, executive director, CavinKare too said his company was not aware of any such development. “We are interested in getting into oral care, but have no information on HUL being interested in selling its oral care brands,” he said.
Wipro Consumer could not be reached for comment.

All this is happening even as Procter & Gamble, the second-largest FMCG firm in India, plans to make a splash in the oral care segment with its brand Crest sometime later this year.