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A major rejig is underway at FMCG behemoth Hindustan Unilever (HUL). The giant is parting ways with Kwality Walls, its ice cream business, demerging it into a separate listed company. Each HUL shareholder will receive one share of the newly formed ice cream business against every HUL share they hold.
Parallely, HUL has acquired direct-to-consumer beauty brand Minimalist. While adding the beauty brand reflects its changing focus toward the higher-margin beauty and wellness market, the demerger of Kwality Walls offers investors a potential opportunity in India's booming ice cream market. We assess if they stand to benefit or not.
Why is HUL demerging Kwality Walls?
The numbers tell part of the story. HUL's ice cream division contributed a modest 2.7 per cent to its overall revenue, amounting to Rs 1,595 crore in FY24. Further, ice cream is a low-margin product. The five-year average net profit margin of the closest competitor in the sector, Vadilal Industries, stands at 7.2 per cent—a far cry from HUL's overall margin of 17 per cent. Besides, the business comes with a significant capital burden, not least the cold chain infrastructure required for distribution.
While parent Unilever announced plans to split off its ice cream business globally earlier in 2024, HUL's decision to do the same signals its willingness to create a nimble structure that can focus effectively on more-rewarding segments. That said, while Kwality Walls may not match HUL's larger, higher-margin businesses, its potential to thrive in India's growing ice cream market is hard to ignore.
The opportunity pie
The opportunity in India's ice cream market is undeniable. Valued at Rs 30,000 crore, it's expected to reach Rs 50,000 crore by 2028, fueled by an increase in per capita consumption (11 per cent annual growth over the years) and expanding distribution networks via quick commerce platforms. At 1.6 liters, India's annual per capita consumption is still low when compared to China (4.3 liters) and the US (20.8 liters). Not just that, unorganised players hold 37 per cent of the market, leaving ample room for organised brands like Kwality Walls to capture a larger share.
Valuation and the investment case
Although the valuation for Kwality Walls' demerger is unknown due to the unavailability of key financial metrics, investors can look to peer Vadilal for a rough benchmark. Vadilal currently trades at reasonable ratios: a price-to-sales ratio of 2 times and a price-to-earnings ratio of 17 times, with a five-year average return on equity (ROE) and return on capital employed (ROCE) of 24 per cent each. These figures suggest that the demerged Kwality Walls, too, could offer a strong investment case, provided management can execute its strategy effectively. Besides, becoming a separate entity should result in a more focused management structure, unlocking operational efficiencies, and potentially improving growth and margins. However, the company's complete financial history and numbers, not available publicly right now, need to be assessed first.
As with any growth story, risks abound. Kwality Walls faces fierce competition from established players like Amul, Mother Dairy, and Vadilal, which could pressure its market share. The ice cream sector is also sensitive to fluctuations in raw material costs, including milk, palm oil, and sugar, which could strain margins. These factors, alongside the seasonal nature of the business, need to be considered when assessing the standalone potential of Kwality Walls.
The Minimalist play
Lastly, HUL's bet on Minimalist further reinforces its commitment to high-margin segments. Beauty and wellness are among HUL's most profitable segments, with margins nearing 30 per cent. Minimalist, which has reached an annual revenue run rate of Rs 500 crore in just four years, strengthens HUL's position in this high-growth space, creating synergies that could accelerate growth in the years ahead.
HUL's rejig reflects a broader shift in its strategy, from low-margin, capital-intensive businesses like ice cream to high-margin, consumer-focused sectors like beauty and wellness. For HUL investors, the demerger of Kwality Walls presents an opportunity to tap into a growing, but competitive market, while the acquisition of Minimalist offers exposure to one of the most profitable and dynamic sectors in the economy.
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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before making any investment decision.
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Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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