Vote of confidence

For a multinational consumer goods giant deriving close to 60 per cent of its revenues from emerging markets and registering double-digit growth in sales quarter after quarter, Unilever Plc’s plan to further raise stakes in its 52.5 per cent-owned Indian arm shouldn’t really surprise anyone. Unlike the US or Europe, which are already saturated markets experiencing poor economic growth prospects, economies such as India offer much more promise, despite the many challenges confronting them. On top of that, there is still huge unmet consumer demand across a wide spectrum of fast moving consumer goods. Since its operating subsidiaries in emerging markets are the ones increasingly driving Unilever’s sales as well as profit growth, the Anglo-Dutch parent naturally seeks to lay claim to a bigger share of their future dividend income streams. Increasing holdings is one way to do it, which is what Unilever has proposed through an open offer to purchase shares that would enable it to own up to 75 per cent in Hindustan Unilever Ltd (HUL).

What has surprised many, however, is the price Unilever is willing to pay for a stake increase that hardly changes its current status as the unquestioned promoter of HUL, which will remain a listed company. The fact that it is prepared to shell out some $5.4 billion to acquire an additional 22.5 per cent in HUL is a testimony to the growth prospects that India is seen as offering in Unilever’s eyes. In the current scenario where everyone seems to have given up on India and there is all-round pessimism on the country’s overall business environment — for reasons quite legitimate — this represents a refreshing vote of confidence. Even cynics can probably draw lessons from it. Is there something they are missing that Unilever and foreign institutional investors (which have poured over $11 billion into India so far this calendar year) seemingly aren’t? Unilever moreover, unlike a Walmart, has been in India for 80-odd years and knows a thing or two about doing business here.

There are, of course, those who believe that a 75 per cent stake will be a precursor to HUL’s eventual delisting — as Reckitt Benckiser or Cadbury’s India have done and what many other listed multinationals probably intend doing. This needn’t be the case though. HUL ultimately operates in a landscape vulnerable to duty changes and regulatory interventions. Having some degree of public shareholding is always a useful tool to ward off such a threat. A 75 per cent stake, in that sense, ensures just the right balance between meeting the minimum public shareholding norm to have the legitimacy of a listed Indian entity and also give the foreign promoter a larger share of its subsidiary’s profits. This is a formula that even other multinationals may consider worth employing in India if they see themselves as long-term investors, as Unilever certainly has shown itself to be.

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