Buying into the India story

At a time when fragile business sentiment and the continuing weakness in consumer demand have triggered question marks over the India growth story

Written by Anil Sasi | Published: May 1, 2013 1:18:46 am

At a time when fragile business sentiment and the continuing weakness in consumer demand have triggered question marks over the India growth story,Anglo-Dutch consumer goods giant Unilever Plc reiterated its confidence in the business outlook of its local arm — Hindustan Unilever Ltd — by offering to pay $5.4 billion (about Rs 29,300 crore) to raise its stake in the latter.

More importantly,the deal comes across as Unilever’s endorsement of India’s broader consumption-led growth,at a time when economic growth is at a decade low. Unilever’s open offer for HUL,India’s largest consumer goods company,could have a rub-off on the entire consumer durables pack and lead to a re-rating of the sector as a whole. This was clearly visible in the immediate stock impact of the deal announced Tuesday morning. While the HUL stock hit a lifetime high immediately after the announcement,finally closing over 17 per cent up on the BSE,many of its FMCG peers hit their 52-week highs after the offer was announced. At the close of trading on Tuesday,along with HUL,Colgate Palmolive and Nestle were among the top five gainers on the BSE.

Unilever’s offer to lift its share to as much as three-quarters of HUL,up from slightly over half currently,also reinforces the global firm’s focus on emerging markets such as India,amid continuing weakness in the US and Europe. In a similar deal in November,the UK-based GlaxoSmithKline Plc offered to buy a further 31.8 per cent stake in its Indian consumer products business for about $940 million.

The other takeaway from Unilever’s voluntary open offer for the acquisition of HUL shares is the offer price of Rs 600 a share,a robust premium of 20.5 per cent to Monday’s closing price of Rs 497.60. This is in line with the trend seen in the Etihad-Jet deal announced last week,wherein the Abu Dhabi-based carrier committed to buy 27.3 million new shares of Jet at Rs 754.74 per share,a 31.7 per cent premium. The significant premiums offered in both the deals reflect the latent optimism that global firms have about the India story.

Apart from the Unilever and the Etihad deals,in November,the UK-based Diageo signed up to buy a majority stake in United Spirits for $2.1 billion. Auto firms too are reported to be investing in ramping up plant capacity despite a decline in car sales the last fiscal year. A bounceback in corporate sector optimism could certainly augur well for the government’s attempts to revive the growth impetus.

Anil is a senior editor based in New Delhi.

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