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n New product launch; small category but robust growth potential
According to media reports, Hindustan Unilever (HUL) will soon launch a bread spread christened Astra Gold. It will contain three times more essential fats with vitamins A, D, E that will aid children’s growth. The company’s beverages, foods, and ice creams business accounts for ~18% of sales while parent Unilever derives ~50% sales from the same. Though this category’s absolute size is currently minuscule, we believe, it has potential to grow exponentially as was the case with popcorn (~50 CAGR) and noodles (now a INR 15-bn category; growing at ~15-20% plus) category. We perceive this launch as positive as modern trade is on an excellent growth path and as disposable incomes increase, healthier variants of products are bound to experience superior growth.
n Spreads have higher gross margins, low penetration and competition
Based on our meeting with AgroTech CEO we conclude that spreads have ~35% gross margins, one of the higher margins businesses in the foods category. Packaged foods have one of the lowest penetrations in FMCG and AgroTech’s Sundrop and Ruparel’s peanut butter will be the only major competitors to Astra Gold. HUL’s soupy noodles is a differentiated product and is doing well post national roll out. Other two new players (GSK, ITC) in noodles have come out with ‘me too’ products, which in our view will find it tougher to expand share over longer time frame as Nestle is strongly entrenched in the noodles category.
n Launch in Karnataka a good strategy
We believe HUL’s plan to test-market Astra Gold in Karnataka is a good strategy as: (1) media can be isolated; (2) the region is known for faster brand adoption; and (3) modern trade has a better presence there. Earlier, HUL had test marketed Comfort fabric conditioner in Tamil Nadu for two years before taking product national. From zero penetration, Comfort managed 10.4% market share.
n Outlook and valuations: Positive; re-iterate ‘BUY’
We are enthused by HUL’s continued focus on differentiated and healthy alternatives in the food segment. We believe the company will enhance focus on new product launches and market share gain in existing categories. We re-iterate ‘BUY’ recommendation and HUL is one of our top picks in the FMCG pack. On relative return basis, the stock is rated ‘Sector Performer’.
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