Kwality Walls to Get Demerged From HUL: Impact and Analysis

Demerger of Kwality Walls

In the recent quarterly result, HUL made two major announcements. First, acquiring direct-to-consumer beauty brand Minimalist and second, demerger of its ice-cream business. In this article, we look at the details of the second announcement. It is in line with Unilever's (parent company) global plan to demerger the ice cream business in all markets.

Reasons behind the demerger

Hindustan Unilever Limited (HUL) is one of India’s largest fast-moving consumer goods (FMCG) companies. It offers a diverse portfolio of products across categories such as personal care, home care, foods, and beverages. Most of their brands contribute a significant percentage is HUL's revenue.

However, that does not hold for the ice cream business. It contributed only 2.7% to HUL's overall revenue. For FY24, the total revenue by the ice cream segment was Rs 1595 crore. Also, ice cream is a low-margin segment for the company. We don't have net profit margins for the ice cream segment of HUL's business.

Vadilal is its listed competitor, and its profit margins for the past 5 years are 7.2%. If we can assume HUL's ice cream segment is somewhere close, then, there is a significant difference in this segment's margins and HUL's overall profit margins, which is 17%. Add to this, this business comes with a significant capital burden, which includes the cold chain infrastructure required for distribution.

The second reason, as we mentioned earlier, is that the parent Unilever announced plans to split off its ice cream business globally earlier in 2024. HUL's decision is on the same lines. And it made sense for the HUL to do it sooner rather than later. Why? India's ice cream market is thriving, and no one wants to miss a pie of it.

The Potential of Indian Ice-cream Market

India's ice cream market presents a significant growth opportunity. Currently valued at Rs 30,000 crore, it is projected to grow to Rs 50,000 crore by 2028, driven by an 11% annual increase in per capita consumption and the expansion of distribution networks through quick commerce platforms. With an annual per capita consumption of just 1.6 liters, India lags behind countries like China (4.3 liters) and the US (20.8 liters), indicating vast untapped potential. Additionally, unorganized players account for 37% of the market, offering organized brands like Kwality Walls substantial scope to expand their market share.

Valuation of HUL's ice cream business

HUL does not disclose the numbers of different segments in quarterly results, therefore, it is not possible to value the ice cream business as of today. Also, even though has given a demerger ratio, it has not said how the value will be determined. HUL investors will need to monitor the updates from the company around the demerger.

Demerger Ratio & Brands

Investors who hold shares of HUL will receive shares of the new entity in a 1:1 ratio. This means existing shareholders will get additional shares of the demerged entity. HUL's ice cream business includes names like Kwality Wall’s, Cornetto, and Magnum.

Before you go - What is there for investors?

HUL's ice cream revenue remained flat compared to the previous year. However, HUL views the ice cream segment as a highly promising business with significant growth potential. In its investor presentation, the company highlighted its focused management approach and the flexibility to implement strategies tailored to the unique dynamics of the ice cream business. It also emphasized that Kwality Walls benefits from the portfolio, branding, and innovation expertise of its parent company, Unilever, the world's largest ice cream manufacturer.