Why Is This Consumer Giant a Good Bet?

Gayatri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Unilever (NYSE: UL) is focused on expansion in emerging markets to capitalize on rapid growth. It has increased its stake in its Indian subsidiary, Hindustan Unilever. The company has added new villages to its Shakti program in India, and new perfect stores in Indonesia. Its sustainable living plan is helping it to retain customers and reduce waste as well as cost. Here is a detailed look:

Increasing stake in HUL to get foothold in emerging markets

Unilever is planning to spend $5.4 billion to increase its stake in its Indian subsidiary Hindustan Unilever (HUL). Currently, the company has a 52.48% stake in HUL and it has made an offer to increase it to 75%. The offer has been made to get 22.5% of outstanding shares at a price of Rs600 per share. The company believes that there is a huge opportunity in this emerging market, and this step is part of its strategy to increase its presence in emerging markets. Unilever already holds 100% equity in most of its Asian and African subsidiaries. After this deal, HUL will become another subsidiary with majority stake held by Unilever, as with its subsidiaries in neighboring Indonesia and Pakistan.

Sustainable living plan

With a motive to achieve long term sustainable growth, Unilever is following its “sustainable living plan.” The company is experiencing growth and changes in business with this plan. This plan is accelerating innovation in the company, with developments like the pure it water purifier. and comfort one rinse. This plan has also helped uplift Unilever’s reputation as an employer. Additionally, many retailers with sustainability goals look forward to partnering with Unilever. It has helped Unilever to reduce waste by approximately 80%, and to save €300 million in the last 4 years. The company is sourcing 36% of its raw materials, and most of the energy in emerging countries, from renewable sources.

New product launches in different categories

Unilever has launched several new products in different categories i.e. personal care, food, home care etc. In personal care, some of the growing brands are Dove and Alberto Culver. The company has launched new products like AXE male face care range, Dove male face care range, Lifebuoy’s premium mix offerings, Ponds BB+ whiteness cream and Youth renewal line from Nexxus. It has received positive response to ‘AXE interspace campaign’ with 600000 applicants from 60 countries. In the food category, results are good for dressings and savory but unsatisfactory for spreads. The company has decided to leverage upon its 100 year old brand Hellmann. In household care also the company has new offerings like Dirt, Fragrances from Comfort, Cif and Domestos. The company had sales growth of 8.3% and 9% in personal care and home care whereas sales have declined by 0.5% in the food category.

Peer analysis

Colgate-Palmolive (NYSE: CL) and Procter & Gamble (NYSE: PG) are two major competitors of Unilever.

Colgate Palmolive faces many challenges, like currency devaluation in Venezuela and inflation throughout Latin America in this quarter. Despite these challenges, it reported Q1 results in line with consensus estimates. The company is heavily focused on product innovation in different categories, and on emerging as well as developed markets. Some new products are Colgate Total Mouthwash with additional benefits in the US. Four new products will be launched under the whitening category, Max fresh brand, Elmex brand and Electric toothbrush category. The company has re-launched its ‘Colgate Total’ brand in Brazil and Mexico, and is expected to launch it in other countries over the next year.

Procter and Gamble's recent changes in top management, and the re-appointment of former CEO, A.G. Lafley, as President and CEO have raised many questions about the company's prospects. Investors have an eye on the performance of the once-and-current CEO, and have great expectations of him due to his past record. Its $10 billion cost cutting plan aims at improving productivity by cutting down on overhead and marketing costs, and the company has made changes in its top management so that it can leverage upon the expertise of the newly appointed leaders for brand expansion.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>P/E ratio</p> </th><th> <p>P/S ratio</p> </th><th> </th></tr> </thead> <tbody> <tr> <td> <p>Unilever</p> </td> <td> <p>19.87</p> </td> <td> <p>1.69</p> </td> <td> </td> </tr> <tr> <td> <p>Procter & Gamble</p> </td> <td> <p>17.27</p> </td> <td> <p>2.46</p> </td> <td> </td> </tr> <tr> <td> <p>Colgate Palmolive</p> </td> <td> <p>23.25</p> </td> <td> <p>3.03</p> </td> <td> </td> </tr> </tbody> </table>

I believe Unilever is a good option for investors, with low P/E and P/S ratios. Colgate's valuations are on the slightly higher side, while P&G is facing uncertainty due to recent management changes.

Conclusion

Unilever is planning to get a strong foothold in emerging markets. It has offered to extend its stake in its Indian subsidiary, and also increased its sales and distribution reach in Indonesia, and such initiatives will help Unilever to achieve long term growth. Its new product launches across many categories and markets will help it to attract customers, whereas its "sustainable living plan" will help it to retain them as well as improve the efficiency of its business. Based on all of these things, I recommend a buy. 

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Gayatri Sharma has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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