Recently the consumer food giant Unilever Plc made an open offer to its Indian subsidiary Hindustan Unilever Ltd. (HUL) to raise its
stake to 75%. The stake of 75% will be a result of undoing what government had done decades ago. Decades ago the Indira Gandhi government introduced the Foreign Exchange Regulation Act also known as FERA act which forced companies to substantially reduce their foreign equity. Also FERA regulated the companies into a host of regulatory controls.
Read about Top 6 Risks and Opportunities of Consumer Goods Companies on GWI.
The FERA rules forced the dilution of foreign shareholding in large number of companies which included HUL too in the past. The move was aimed to help the Indian capital market grow. The rule definitely gave a boost to India’s primary capital market. The move helped the finance ministry to encourage increased participation of Indian shareholders and thus amazing success story of Indian capital market along with several companies were written.
Indian Companies opting for Delisting from the Indian Market
Now times have changes, so have regulations/norms/policies. A 360 degree change is witnessed currently when a bunch of companies with major foreign holding are willing to delist their company from the Indian market. The foreign companies (promoters) are either increasing the stake in their Indian subsidiary company well beyond majority or are opting for delisting. In case of HUL however, the promoter Unilever Plc has no where mentioned about its intention of delisting in India. The company has however stated its intention to participate more in the Indian growth story.
Unilever in India
The fear is on the other side. Going by the trend followed by major MNCs in the past, it is doubted that Unilever too will take down its Indian Subsidiary and its denial cannot be taken at face value. India being a developing economy with high GDP growth rate as compared to global GDP growth, it is expected that the Indian market will soon increase manifold when it comes to consumer goods. The increasing disposable income along with improving standard of living would become some of the major drivers for the sales of FMCG companies. Currently India is Unilever’s third largest market, which might improve pretty soon.
Read about other Major FMCG companies in India.
Advantage for Unilever in Developed Countries
The financial environment in the developed countries is favorable for Unilever as their monetary policy is such that the interest rates there are at historical lows. Companies having top credit rating and proven track record (like Unilever) can borrow at relatively low rate of interest which can be invested in high yielding assets in emerging markets like India. The company recently raised $1 billion in the US in two branches through a five-year bond at an average coupon rate of 0.65%.
Unilever’s Open Offer
The Unilever’s offer price of 600 INR carried a dividend yield of 3%. So going by the fact that HUL over the last 5 years has distributed over 70% of its net profit as dividend, which is growing at a rate of 15% annually, it is expected that the yield on current offer would grow at a rate of 5.9% in five years which can further reach the level of 12% in 10 years. The impact of rupee is neglected in the case. However the yield could be even higher if the rupee appreciates. Thus we see a heavy gap in Unilever’s cost of capital and yield on its HUL equity investment. The method is one way by which Unilever can return market beating returns to its shareholders.
Open offer by Unilevel is definitely a lucrative offer, given the high offer price and high interest rate in India. However, the question remains if one should give up holdings in a company which has given returns as high as 90% in equity as compared to Sensex. Talking of the Indian market, the delisting or reduction in free float of HUL shares would be a major loss to the Indian equity market, as HUL remains the largest and most important consumer goods company of its kind in India. HUL is undoubtedly a must-have stock in one’s portfolio which always gains.