For listed subsidiaries of consumer multinational companies in India, a key driver of medium-term operational performance and stock returns has been the alignment of global parent strategy with the needs of their India business. HUL’s weak performance over 2000-04 and strong performance over 2010-14 were driven by shifts in global parent strategy.
Our analysis shows that HUL and Colgate are best placed to gain significantly from their parent strategy in the medium term, while Nestle may be constrained. HUL and Colgate are also among our top picks from a one-year view, as we expect earnings acceleration from lower input costs and gains from GST (goods and service tax).
Impacted by parent strategy: The impact on Indian subsidiaries on the global strategy of their parent company is increasing, with companies globally sharpening category focus, and management incentives structures now globally aligned. We narrow down to five factors related to the parent strategy that have the maximum influence on Indian subsidiaries:
(i) Global focus on categories important for the India business —this drives innovation in these categories; (ii) growth vs profitability bias—India gains in phases of growth bias as short-term margin pressures are lower; (iii) empowered India local management—India does well when local management is empowered, given the complex market; (iv) keenness on bottom-of-pyramid opportunities—India is full of these opportunities; and (v) the importance of India to the global performance—strategic resource allocation is disproportionate for India.
When the strategy of the parent company is highly aligned to the priorities of the Indian subsidiaries, it creates strong tailwinds for the India business. On the other hand, misaligned strategies create significant headwinds for companies. This is a critical factor that determines medium-term performance of these companies.
Unilever, Colgate most aligned to India business: Based on the above factors, Unilever’s global strategy seems most aligned with the priorities of the India business, which is HUL. The Unilever-HUL alignment ticks off all the boxes of category focus, growth bias, empowerment to local management, tapping bottom-the-pyramid opportunities and India’s importance to the global business. HUL is also aided by P&G’s global strategy, which at the current stage focuses more on the profitability of EM (emerging market) businesses like India, and hence has led to a lowering of competitive intensity in key categories like laundry for HUL.
Colgate is also relatively well-placed in the global and India alignment. Nestle seems to have been adversely impacted by the global shift from only a growth focus to focussing on growth and returns together as the company is unwilling to make investments in categories that currently may be loss-making but will grow over time in India. Nestle made big capacity additions during the years 2011-14, which is possibly struggling to make expected returns.
GSK Consumer is run like a local business in India, as the key category of malted foods is not a global category for the parent. However, the parent is not constraining local management to explore growth opportunities even in new categories where the parent does not operate in India– strategic resource allocation is disproportionate for India.
HUL best placed to gain: Among Indian MNC subsidiaries, HUL’s priorities are best aligned with its parent and hence HUL has the most tailwind from its parent. Unilever is clearly focussed most on personal care, which is now its biggest segment and is also the largest segment for HUL. Unilever is globally acquiring personal care brands and investing in innovation, which are being quickly rolled out in India. HUL’s local management is the most empowered among MNC peers, with strong local talent. HUL also has the leeway to innovate products specifically for Indian consumers’ needs.
Unilever has a bias for growth, which helps India, and there is a global drive to tap into bottom-of-pyramid opportunities. P&G is HUL’s main competitor in India in many categories. P&G’s global strategy is currently focused on the profitability of emerging markets, with India, having very low margins, seeing pressure to up margins, even at the cost of cutting ad spends. This is a further tailwind for HUL as competitive intensity is relatively benign in this phase.
Colgate has tailwinds: Colgate is also a beneficiary of the very strong innovation pipeline of its parent in oral care, which is helping drive premiumisation and market share gains in India. Colgate is also relatively empowering its local managements further, though not to the extent of Unilever. Nestle, on the other hand, is excessively margin-focussed. The parent has been unwilling to launch new categories into India as it fears near-term margin dilution, thus trading off long-term growth with near-term margins.
—Credit Suisse