Hindustan Unilever’s (HUL) Ice Cream Business Demerger: What It Means for Shareholders

In a strategic move that has caught the attention of investors, Hindustan Unilever Limited (HUL) has announced the decision to demerge its ice cream business. In this blog post, I’ll try explores the implications of this decision for long-term shareholders and potential investors in HUL. By the way, I’ve been awaiting for this decisions since March 2024. During that time, the parent company Unilever (UK) also announced the separation of its ice-cream business as a standalone entity.BackgroundHUL has long held a diverse portfolio ranging from personal care to foods and refreshments. It included well-known ice cream brands like Kwality Wall’s, Magnum, and Cornetto.Despite these brands’ popularity, the ice cream business constitutes roughly 3% of HUL’s total revenue. In terms of value, the ice-cream business stood at approximately Rs.59,144 crores till the end of FY23.The Demerger DecisionThe decision to demerge comes after Unilever’s global strategy to streamline operations by separating its ice cream division.Looking at this decision from HUL’s perspective, this move aims at:Focus on Core Business: By separating the ice cream business, HUL can sharpen its focus on its core segments like beauty, personal care, and home care. These business streams have higher growth potential and less seasonal dependency.Unlocking Value: A standalone ice cream entity could potentially unlock value. It may also attract investors interested in the high-growth potential of the ice cream market in India.Operational Efficiencies: The ice cream business requires a different operational model. It needs a specialized cold chain distribution networks that adds to this line of business more complexities. May be, HUL has weighed that, the return generated by this business vertical is not complementing the efforts it requires to keep the business running. It is true that, the ice cream business differs significantly from HUL’s other product lines.Impact on ShareholdersValue Creation (Ice Cream): Shareholders can benefit from the demerger if the ice cream business. As a separate entity, the ice-cream vertical can attract a higher valuation. A more focused management will also result in better performance.Dividend or Shares: Depending on how the demerger is structured, shareholders could receive shares in the new ice cream entity. Else, in long term, the shareholders of HUL can also benefit (extra dividends) due to increased cashflow from the ice cream vertical. Although, the details on this are yet to be finalized.Strategic Focus: With HUL focusing more on its core businesses, shareholders could expect improved margins and potentially higher dividends or share value from the streamlined operations.Market Sentiment: In India, the ice cream business is a very visual entity. HUL deciding to seperate it from its core business may get perceived as negative. But it is point worth noting that the ice-cream business is just 3% of the total revenue of HUL.Considerations for Long-term InvestorsGrowth Potential: The Indian ice cream market is growing, and a standalone company might innovate and expand more aggressively.Risks: The ice cream business faces intense competition and seasonal fluctuations, which could affect profitability.Strategic Investment: Investors need to consider if they want to hold shares in a more focused FMCG giant. Anyways, future growth potential of HUL is driven more by its FMCG vertical (cosmetics & non-icream food business) than the ice cream business.ConclusionFor long-term shareholders of HUL, the demerger of the ice cream business presents both opportunities and considerations.While the immediate benefits include potential value unlocking and strategic focus, the long-term success will depend on how well both HUL and the new ice cream entity capitalize on their respective market positions.Investors should keep an eye on how this demerger is structured. The management’s plans for both entities, and broader market conditions influencing FMCG and specialized food sectors.This strategic move by HUL could result in a new era of growth or present new challenges. But for the informed shareholder, such moves often results in better future gains.Final Words…Remember, at present the whole FMCG industry is showing subdued performances. We in India are used to seeing fantastic numbers from top companies of this sector. So, the question is, is the mojo of the FMCG industry gone forever? In a growing economy like India, where the middle class is growing along with the per-capital income, FMCG industry will probably grow multiple times from here.In such times, accumulation of quality FMCG stocks can be a strategic buy. Though it must be kept in mind that these stocks will not yield a 30% CAGR return, but they are more likely to yield stable returns that will definitely beat the broader index.Have a happy investing.