HUL: Will Demerger Of Ice Cream Business Be Value-Accretive?

"If HUL looks to demerge it (the ice cream business) at its current size and scale, it would be at a lower EV to sales multiple, versus HUL’s current 8–9 times, so clearly not value-accretive to either demerge or sell it off," said Ajay Thakur, research analyst at Anand Rathi Institutional Equities.

In the Lotte-Havmor deal in 2017, which can be looked at as a benchmark, the sale valued Havmor at more than twice its sales. Even if the multiple is assumed to have expanded 3–4 times, it is lower than HUL's current valuation, Thakur said. "Thus, any possible split will value the ice-cream business possibly at half of HUL’s valuation, or even less than that... An opportune moment, rather, to sell the business would be when the business has achieved a larger scale."

The ice cream division—which includes Kwality Walls, Magnum and Cornetto brands—is a fraction of India's largest consumer goods business. In FY23, ice creams contributed to 3% of HUL's revenue of Rs 58,154 crore. It isn't a significant contributor to profitability either, with analysts pegging its contribution at about 2%, making a case for the company to sell off the business. However, there's ample opportunity for HUL to grow the underpenetrated business in the country, according to Thakur.

The per capita consumption of ice cream in India is among the lowest across the markets where Unilever does business.

The yearly ice cream consumption in India is currently 400 ml per capita, which is abysmally low as compared with 22 litres in the U.S. and 3 litres in China, according to global insights company Research and Markets.

The management of HUL had earlier said its out-of-home purchases still play a significant part in ice cream sales, but the Covid-19 pandemic opened new quick commerce channels to supply ice cream to consumers in homes, it said.

HUL's ice cream business delivered a "stellar performance" in fiscal 2023, growing 37% year-on-year, led by a strategy to "de-seasonalise" ice cream consumption. These platforms accounted for 10% of sales, HUL said.

The ice cream business, however, has been an underperformer in 2024, with the company struggling with volume growth across its businesses. It has reported mid-single-digit growth in its ice cream business in each of the quarters so far this fiscal. In the April-June quarter, which is also peak season, ice cream volume declined. It's not just the ice cream, though.

Revenue from ice cream is included in the food and refreshment business, which accounted for 25.5% of the company’s total revenue for the financial year 2023. High food inflation has impacted its food basket more than the other two businesses—home care and beauty.

Parent Unilever said it would split off its ice cream business as part of its extensive three-year cost-saving plan. However, the Indian subsidiary said that its ice cream business has an inherently different business model, including a cold chain go-to-market operating model, seasonality, and a different innovation rhythm, as compared with the rest of Unilever's business.

"We do see a low probability of any big change in HUL as of now," said Abneesh Roy, consumer sector analyst at Nuvama Securities.

HUL may look to retain the ice cream business like it had for the tea business even as its parent sold off other countries' businesses, he said.

Analysts seem to be factoring in demand concerns to some extent and also the fact that ice cream is a cost-heavy business.

HUL said its cost savings programme, called 'Symphony', generates gross savings to the tune of 6% of turnover every year. "We will closely assess the global initiatives of Unilever under the productivity programme and assimilate best practices to take Symphony to its next phase."