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One of the consequences of being a subsidiary of a giant international company is that individual aspirations tend to play second fiddle to the larger organisational objective. It can take the form of underinvesting in the subsidiary’s business despite market conditions being ripe for growth because the global business is going through a difficult phase. Or, it can even mean exiting a business with bright prospects following a global decision.

Hindustan Unilever had found itself in this position not that long ago when its parent company Unilever decided to exit the packaged tea business globally. But something unusual happened on this occasion. HUL was able to retain its tea business, with India and Indonesia being the only exception to the sale.

This came as a relief to HUL’s investors as tea was an important part of the beverages’ business and while selling it may have brought in cash, HUL has little need for cash since it is a cash-generating machine itself. And the tea business still retains growth potential in India. Apart from the market’s natural growth potential due to a growing consumer class, conversion from loose tea to branded tea adds to the growth opportunity. While the spike in tea prices in recent years may have bent downwards the conversion trajectory somewhat, hopefully it’s only a short-term blip.

Now, HUL finds itself in a similar position after Unilever announced in March 2024 that it intends to separate its ice creams business globally. On Friday, after markets were closed, HUL announced the setting up of a committee of independent directors, to evaluate in detail the prospects of the ice creams business and make recommendations to the board. The board has also approved exploration of potential structures and alternatives for the restructuring. The news appears to have enthused its investors as its shares were up 2.5 percent on Monday, September 9, at 12.40 pm.

Now, HUL’s ice creams business may not be as large as the tea business, and is said to have contributed around 3 percent to FY23 sales. In its latest quarterly results, the company mentioned the business had seen an uptick in sales. But ice cream has potential to turn into a substantial business for HUL over the years. The market growth itself is impressive with sales growing at around 15 percent per annum in recent years, according to news reports.

There are the usual suspects driving consumption growth, such as growing consumer demand and affordability, growing urbanisation, entry into newer markets,  growth in electricity availability creating more chilling capacity in newer markets and shift from unorganised to organised players. But a key factor driving growth is in-home consumption, which is likely to have got a leg-up from the growth of quick commerce.

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The ability to think of an ice cream flavour and have it delivered home in 10-15 minutes speaks to the very impulse nature of this category. That’s why HUL’s CEO and MD Rohit Jawa had said that quick commerce is a very significant channel for its ice cream business. Kantar data for the last two quarters of 2023 showed out of home’s share in ice creams in India at 93 percent and 95 percent. That was the highest even among emerging markets, with the shares ranging from 70-80 percent in countries such as Brazil, Thailand and Mexico. The scope for an increase in in-home consumption is, therefore, quite significant and can lead to a step-up growth in the market size.

The market is, of course, a highly competitive one, with Amul as the number one player but HUL comes in at the runner-up position. While the dairy co-operatives give stiff competition, there are regional players too who play a key role in their markets of operation. A number of D2C brands have entered the market as well. HUL had also signalled its conviction in the business’ potential by acquiring Adityaa Milk’s ice cream business in 2016.

These are some of the aspects that the committee formed by HUL will no doubt consider as they make recommendations on the way forward. Shareholders may be keen on an option where if parent Unilever settles on a demerger, then India also spins the business into a separately listed entity. HUL shareholders will then hold shares in proportion to their current holdings.

They can, of course, then determine if they choose to stay invested or sell their shares depending on their view of the business. But another consideration can be if the business’ growth plans can be funded through internal accruals. The standalone profitability of the business too will be examined. Therefore, another structure that could emerge can be the business being transferred to a subsidiary which is then sold to the demerged Unilever ice cream company for cash. This will then make it a privately-held 100 percent subsidiary.

The first option gives shareholders the option of staying invested in a high potential, high growth business but in the longer run. The second one will generate a cash bounty that the company can use to acquire another business or pay back to shareholders as a special dividend. The jump in its share price indicates that perhaps investors are hoping it’s the first option that makes the cut.

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