Ladies and gentlemen, good day and welcome to the Hindustan Unilever Limited conference call for GSK Merger Update. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Sood, Group Controller and Head of Investor Relations at Hindustan Unilever. Thank you, and over to you, sir.
Thank you, [Rio]. Good afternoon and welcome to the conference call of Hindustan Unilever Limited. Today, we will be covering an update on GSK-CH merger. On the call from HUL end is Mr. Srinivas Phatak, Chief Financial Officer, HUL. We hope that you are staying safe and keeping healthy. We will start the presentation with Mr. Srinivas giving an update on GSK-CH merger, covering a deal recap, recent results of Nutrition business, and a strategy for this business, and an overview of synergies. I will share with you key financial and reporting aspects related to the transaction. Before we get started with the presentation, I would like to draw your attention to the safe harbor statement included in the presentation for good order's sake. With that, over to you, Srini.
Thank you, Amit, and good afternoon, everyone. Everything Amit summarized, we're going to focus the presentation over the next 15-20 minutes on three aspects. I'll give you a bit of a recap of the deal and an update on the results. Part of it you heard yesterday, but we'll also talk to you about the full year results. I think it's important to really capture in an acquisition like this the whole strategy and the synergy benefits, and therefore we will spend some time there. And I think there are some very clear aspects relating to finance and accounts and tax, which we'll cover off in the end. I think if you see, this is a deal we announced back in December 2018, and I think the strategic rationale and the opportunity was very, very clearly articulated.
This is the number one HFD business in perhaps what is the largest HFD market, with iconic brands such as really Horlicks and Boost coming into the fold. And in a manner as Sanjiv describes it, it's a marriage made in heaven. So the big opportunity is really an opportunity of market development given low penetration, ability to use the full sciences and the R&D portfolio to drive premiumization, and to really start to leverage the distribution capabilities. At the time of the merger, we had actually called out that the business was poised to grow in double digit into the medium term and margin expansion of anywhere between 800 basis points to 1,000 basis points using the FY 2018 financials. That really was a quick snapshot summary in terms of what we had announced in December of 2018.
Now, what we're going to do is you had already seen the nine months results which got published as GSK when it was a standalone company. I think what we are giving you a flavor of the picture is the total results for the full financial year 2019-20. Needless to say, given what had happened with COVID and as you have seen with many other businesses, even GSK had got impacted because of the lockdowns in the month of March, which really amounted to the total, and obviously in March quarter was a negative quarter in terms of top-line growth.
But therefore, for the full financial year, the growth of the business was really about 1%. The second piece is, I think an important one is really to understand the reported margins versus the operating margins or the underlying margins as we call it.
While the reported EBITDA margins, what you had really seen was amounting to about 32.7%, or you would have seen on the full financials. I think it's important to call out that the underlying margins were at about 28.1%. There were a significant amount of one-offs in the financials of GSK. Part of it you would have also seen reported as other income when you saw the nine months results. And more importantly, there was also a big settlement of a tax case pertaining to the prior years, which happened using the amnesty scheme in the month of March, which therefore resulted in a benefit in excess of about INR 208 crore or INR 210 crore.
I think it's important to distinguish those from the underlying margins because I think what you really see is a picture of how the underlying margins are likely to move in this business into the future.
And, consequent to that, you have the PBT and the net profit numbers, which starts to give you a sense of the business as we have got in our hands from the 1st of April. Yesterday, I think we had a good discussion for many of you who have attended the call in terms of how the first quarter has been. It's been a seamless integration, a quarter where we have delivered competitive growth. We are gaining market shares. And we did talk about both the value-added innovations as well as the access packs. Again, to clarify on this 5%, just making sure everyone understands it. This is comparing the June quarter numbers in HUL. This is domestic sales growth. I think that's an important aspect to clarify.
This is domestic sales growth as reported in HUL compared to the base quarter of GSK of June 2019, and the domestic consumer growth or domestic sales growth was about 5% with a good combination of volume and price. We clarified yesterday saying that this doesn't have exports clearly. And I also mentioned that the exports were impacted during transition for a couple of reasons. First is there was a bit of stocking up which happened to the exports consumers between December quarter and March quarter in anticipation of the merger coming through because there the pipelines tend to be longer given the transit times. And there are also some transition issues in exports given that you need to do a lot of compliances in various markets as you make the shift. A combination of that has meant that the performance in exports has been muted.
We firmly believe that it's more a transitory issue, and our focus was really first on the domestic business, and they should sort itself out in due course as the whole operational chain comes into being. Now, let me give you a little bit of a, and I think these questions have come up quite a few times saying, "Is that fine? If you had a strategic rationale as expressed at December 18, how does the picture look today?" And do some of the strategic drivers and levers hold true? I think let me try and explain that picture in the next few charts. I think there's an important one. I think we continue to call this as a category with massive penetration opportunity. And I think those, and when you look at it from that perspective, I think that really holds good.
There is the whole space in terms of a young population with big nutrition needs. I think that's an important one, and if you really see them, as we are also trying to fortify the products with addition of zinc, vitamin, and iron, I think there is an ample opportunity for us to actually address the nutrition needs of our consumers and target audience and continue to build the brand. And the good story for us is that we will continue to have a lot of young population, which is also the core market to the brand. You need to be obviously doing very well in your core segments before you actually try and expand and build into the high sciences and the adjacencies.
One of the key elements is really looking at the rural India opportunity because if you remember, we had also spoken about how the penetration levels in rural and urban tend to be very varied. And actually, what we are actually painting a picture for you is really in the two citadel clusters for this business, which is South and East. Because if you were to look at the opportunity landscape from a North and West, it only gets bigger because Horlicks and Boost, for all of you who have been tracking this story for a long time, know that really the citadel markets are South and East. Even in this, when you look at it, let's say from a penetration perspective, urban-rural, I think there is massive headroom to go. And I think there's also a good competitor that you see in terms of coffee.
Coffee's got very similar urban penetrations, and rural, it's actually a bit better, but even there, you're continuing that you've seen that we continue to do well year on year, and we continue to really lead the market and grow the market, and therefore, when I contrast it with HFD, the rural penetration in even these markets is a massive opportunity, and the urban continues to be a big one too, and the picture is quite similar when you were to actually think about from an East India point of view. I think this gives you a bit of a comparator, only to make the point that we have been continuing to grow our coffee business very strongly, both in urban and rural, and therefore, even in these citadel markets, there is a fair amount of headroom to grow.
One of the key aspects is also about the whole sachet and the volume contribution. If you see from an HFD perspective, if it's x, I think in coffee we do 3x. Therefore, you can do this job of actually leading market development with the right price pack architecture while you continue to drive a value-accretive model in its entirety. I think getting a lot of penetration is going to be super key, and therefore, rural is a big opportunity. Yesterday, we talked about this both in terms of relevance given the current context of people trying to really boost their immunity. We also talked about launching some of the packs on a poly pouch format, which is almost 20% cheaper and therefore makes it more affordable for the consumers to really come into the category and actually boost growth. The other aspect is GTM.
And I think all the work that we have done is completely reiterating the way we have really looked at the business, which actually, and what we have seen over the last 12-18 months, and more so deeply in the last three, distribution continues to be a massive opportunity, whether it is in terms of numerical distribution. And here is where we have given you some flavor in terms of what it is from Horlicks, Boost, comparing with F&R, and thereafter to HUL. Obviously, the story continues to be an interesting one because as we continue to expand the opportunity for HUL, we shall do so for the totality of what is coming through from, let's say, Horlicks and Boost. In addition to that, I think there are some clear spaces where HUL has got a unique advantage.
In a manner, these are kind of white spaces completely open, and these come over and above the numerical distribution that you talk about. Whether it's our expertise in a modern trade and e-commerce channel, where if you see in a manner GSK portfolio was underrepresented, and I think we've got a significant advantage. As many of you are aware, we have got a very strong business in the South in terms of out-of-home and hot tea shops. I think that's a space where we can actually start to see Horlicks and Boost have a play. Shakti as a channel is obviously a very impressive one, and I think we will continue to build.
Interestingly, in all of this, I think what we also gain is the whole space of pharma and chemist with a combination of the HUL portfolio, the HFD portfolio, and we also servicing the OTC parts of the GSK business, and if you just throw in some of our other acquisitions such as VWash, I think our whole portfolio carry that we take into a pharmacy and a chemist gets further strengthened, and I think that's something which is going to help us super really in a big manner, there are also aspects of direct distribution and indirect distribution in GSK, so I think that'll also be a good opportunity for us to, while we expand directly, also to leverage some of the indirect distribution.
As we speak, we are evaluating some of that, and that'll also give us some unique opportunities to actually bring in some more newer business models into our fold. I think this is the other space. I think once, and I think if you really see, all these are structural opportunities available. While we've talked a bit about the core, clearly, whether it's in terms of maternal nutrition, whether it's women's nutrition, or other deficiency and wellness, there is a massive opportunity. Even if you look at some of the consumer panel data, and if you try and see some households of what is feasible, and not to say that you can't increase those households further, I think today's presence is quite minuscule, which in a manner also then starts to offer massive headroom to really play.
Obviously, these have all been structured and phased out because while there are many opportunities, I think the important part will be to really get a strategic rationale right and then follow it up soon with some brilliant execution. So that gives you a bit of a flavor in terms of the top-line aspects. I think if I have to add a couple of elements, there are. I think this will work in two or three phases. Some parts of the work, especially if you look at the go-to-market, is something that we are doing straight away.
But for us to actually capture the full benefits of coverage, it will also be important for us to complete the integration of first. We'll have to first roll out SAP and complete the integration of the IT systems because, as you are aware, a lot of the operations from an HUL standpoint really work using data and algo and details. And I think that is going to come through in terms of once we complete the IT integration across all the systems, which is likely to take about 12 months as we speak and as we stand here. Let me also give you a bit of a flavor from a margin expansion point of view. Obviously, and we had said this repeatedly, said that we had used the 2018 margins as a base when we really looked at the deal and the deal synergies.
Therefore, it's also important to understand that in the course of these 18 months, definitely the business has seen margin expansion, part because we have been exchanging notes and ideas, part also because the GSK team did a good job in terms of driving some synergies, and we expect that somewhere between 250 and 300 basis points of synergies have actually been captured by the business during this period, and it also places in a good manner because while we all look at the optics of margins, in a manner, whatever comes through as a savings comes through directly from day one in terms of cash coming into us.
If you really look at it as a combination of benefits coming through between material, a little bit between non-material, and parts of for BMI, obviously, some of the GSK did some good work in taking some of the promotions out of the equation, and that's how they've looked at some of the savings. When we look at what is possible, I think there is massive amounts of synergy possible, both from a growth perspective as well as from margin. Media and procurement is one big area of scope. I think as we explained, some of the media savings have started to come through straight away right from April as HUL has taken over the complete media buying and the agency relationships, and we are leveraging our scale.
I think that is coming through very well, and we've got off to a very good start when you start to see from a media buying point of view. Equally, I think there is a lot of work which is happening in terms of using the media golden rules and the digital framework which we have perfected over the years to also actually cover our Nutrition business. With respect to procurement and materials, that's been a very detailed mapping of suppliers, sources of raw materials, packing materials, cost models. And in the course of the next, starting now into the next 12-24 months, we'll start to realize a lot of those synergies. And these will take time because there are various relationships, and there are aspects of spec, there are aspects of rate, and in some cases, they're all linked.
That's where our procurement teams are really working through to really realize it. I mentioned to you about CD. The CD benefits and the distribution benefits will come through in waves. Some of the mapping which we are able to do, which are not acutely system-dependent, are happening as we speak. Some of the best practices in terms of how HUL looks and manages CD is already getting rolled out. The full benefit of the data and the tech is actually we'll get it fully once we integrate the systems. Therefore, that gives you a bit of a flavor in terms of the time horizon. Supply chain has got multiple facets to it. Supply chain has got facets too in terms of distribution, in terms of depots and what you can do. There are about 20 odd depots which they have.
We have completed a mapping exercise to see that many of them can be overlapped. Obviously, there is a timing and an execution phase to it, also given what's happening in the current market context. Some of the physical aspects of operations are constrained. I think that is something that we are likely to see come through over the next 12 to 18 to 24 months. I think some of those will happen very well. Then there are also opportunities in terms of looking at the factory operations and our CMOs and actually looking at infra upgrades and what can you do to drive some of the productivity and some of the structural benefits in a factory. Some of this will also come with lots of investments.
But these are likely to take some more time because our first focus will also be to try and drive growth, get some of the low-hanging fruit, and continue to do some of these benefits. And you have seen that in the own space of HUL, whether it is our overall margin management program or, let's say, some of our very focused non-material supply chain cost programs. We have an absolute rhythm of trying to drive these benefits into three, four, five-year horizons. And there is an absolute playbook in terms of how do we unlock some of these benefits and the sequence. While therefore, this could look a little bit of a longer-term plan in comparison to the others, but it's a very, very robust and a structured plan which unlocks efficiencies.
Similarly, as we look at some of the indirects, obviously, we've started to get some benefits which have already come in. You would have seen that there's a lot of the top management has not moved into the company, and therefore, those benefits have come. Our second will all be linked in terms of how we then try and integrate our various systems and operations and processes across the two entities and get them into similar platforms and how we run it. That actually will then start to give us an opportunity to take a lot of duplication and costs which happens, whether it's in terms of systems or in terms of processes. But this therefore starts to give you a bit of a flavor in terms of how you need to think about synergies and some of the routes to really unlocking them.
I think this is a chart which all of you will be interested in terms of therefore what does the picture look like, and I think here is where we are starting by talking about an underlying operating margin of about 28%. Given that we have bought the brand, therefore, the benefit of royalty will come into the kitty, so that is actually something which is going to add, and therefore, the starting point becomes at about 31.1%. At the time of the deal in December, we had called out benefits between 800 and 1,000 basis points. If we remove the aspects of synergy which we have already come through, that then starts to give you the potential to realize margin synergies that are anywhere between 550 and 700 basis points.
It will also be important to recognize that while the capture of the cash is going to be very, very clear, many of these will also be directly identifiable to Nutrition business, and they will come in F&R. But it's equally possible that some of this will come into other parts of HUL business, and that's only understandable. For example, if you're going to start using common depots, if you're going to integrate it and manage it on a consolidated basis, you will absolutely start to see the cash and the synergy realization. But given some of the ways we will, and similarly, when you start to combine truckloads to combine loads in a truck to actually dispatch, they will then tend to morph, and in some of these, after a point in time, rather than hair splitting, I think it will be important to actually capture the value.
And anyway, some of the accounting and the allocation rules go in terms of what is predetermined set. So in a manner, we will see a lot of the benefits from a nutrition point of view, but there is also a reasonable chunk which could end up in other parts of HUL. And to be honest, we haven't done that exercise in terms of fine-tuning it at this stage, and perhaps it's not warranted. I think there is bigger energy and effort in actually going in terms of realizing some of these benefits. So therefore, that gives you a bit of a flavor in terms of how we are thinking about the synergy benefits. Therefore, to make sure, and I think this is something which we had shared earlier when we captured a GSK update, we're also actually continuing to keep two distinct teams.
One is really operating the business from a CCBT perspective, and second is really running an integration team who continue and make sure that we complete all these tasks, activities, run the networks for really realizing all the synergies, and therefore, these two teams will work seamlessly to unlock the opportunity. This is typical textbook playbook stuff in terms of how you are thinking about the overall integration. I think suffices to say that, look, there's an end to it. There's a very clear organization, there are very clear resources, and there is all anchored around an integration Board which really has the attention of the highest levels in the organization with a lot of the management committee and Sanjiv himself to make sure that we completely unlock the value creation opportunities.
While we do that, I think it's also important to call out that there are various facets where I think we will benefit really leveraging some of the expertise areas or the channel and other options which are available from a GSK. I think some of the key ones to highlight would be the R&D sciences, the doctors' reach program, some of the hospital coverage. We've spoken about the pharma opportunity. I think all these will not only give benefits to the HFD part of the Nutrition part of the business, but also to broader HUL. So these are some of the best practices or some of the quality practices that will actually pick up from GSK or the Nutrition business and now roll it out further. Yeah? So I'll now hand over to Amit, who's going to actually give you some of the details and aspects of the financials.
So over to you, Amit. Amit, are you able to hear me, please?
Amit has just dropped off. We are connecting him. One moment.
All right. Just let's wait for a minute.
We have the line from Mr. Amit fully reconnected.
Okay. Amit, now I've got the financial charts. Yeah? And will you be taking them up, please?
Yes, I will be taking them up. Srini, I could request you to please move the slides for me. My apologies. My line dropped.
No, no, no. Absolutely. I will do that. Yeah? All right, Amit.
Okay. So like you said, I will now be taking you through and talking you through some of the financial, taxation, and reporting-related implications of this merger. So I'll first start with transition costs.
As you would recall a couple of slides back, Srinivas spoke about that we as HUL and GSK-CH had been operating on two different ERPs, and we are working with next 12 months' horizon to integrate our ERPs. In such time, we will be availing TSA services from GSK PLC, and we will be paying them an approximate cost of INR 80 crore over the next one year for this. So that will be one short-term cost which we will be seeing in our P&L.
The second one, again, like we had called out yesterday during our results call, was all exports of HUL are housed under our 100% fully-owned subsidiary UIEL. And like all the other exports, even the GSK-related HFD exports have now been moved to the UIEL subsidiary starting from first quarter of this year. The entire impact of this is visible in the consolidated results of HUL.
Lastly, as Srini spoke a couple of charts back, in order to realize the full potential of P&L savings and the synergies in the near to medium term, we will be investing in integration costs, and we will be reporting them under the exceptional line item, and you also got a view of that in our current quarter where we had reported costs related to M&A under exceptional line. I will then move on and then talk you through the OTC/ OH arrangement. As you would recall, that in addition to the merger, we have also taken on the distribution for the OTC /OH portfolio of GSK for a five-year period. We will be realizing consignment service commission from this arrangement, and we will be reporting this under other operating revenue line of our P&L as we did in the current quarter.
The only nuance to this would be previously GSK-CH had been reporting it at a gross payment. We will be removing costs which are related to detailing, and we will be reporting a net number. However, from a P&L perspective, net margins will stay protected. Moving on, from an accounting standpoint, this merger qualified as a business combination. And as you would see that under the scheme of arrangement, we had agreed to a share swap ratio for every one share held in GSK-CH. We were to issue 4.39 shares of HUL. Hence, to discharge this consideration, we ended up issuing INR 8.46 crore equity shares at a share price of INR 2,179.7, which was on the 1st April 2020, the effective date. Hence, the total consideration for this merger which we paid was INR 40,242 crore, which will be recorded between share capital and securities premium.
In terms of assets which we acquired through this, in parts, the tangible assets like property, plant, and equipment, intangible assets in form of brands and customer relationships, other net assets like working capital and cash. The standard also requires you to, in the case of a business combination, fair value contingent liabilities. So we did fair value some of the contingent liabilities which GSK-CH had disclosed, and we brought them onto our books. Also, as a result of this fair valuation exercise, differences come up between the accounting books and taxation books. Hence, to recognize these differences, we had recognized deferred tax for this fair valuation exercise. The difference between the consideration so discharged and the net assets so acquired has been recognized as goodwill. If we move on, so this slide would be of particular interest because we've been receiving questions on this.
I will not talk to you about the accounting and taxation implications related to intangibles. We will first start with saying that how did we deal with intangibles in our accounting books. There are two kinds of intangibles which we have acquired through this merger. Ones which have indefinite life, these have been recorded at fair value, and they will only be tested for impairment, but there will be no depreciation or amortization on these intangible assets. Some of the other assets which have a finite life, we will be amortizing them and depreciating them over their useful life. When it comes to taxation books, all intangible assets, whether they are indefinite life or finite life, will be added to the gross block of intangible assets, and we will be claiming depreciation on that.
At this point in time, it's important for us to remember that this was a tax-neutral merger where effectively when the share swap happened, there were no taxation implications in the hands of shareholders, and neither were there any other taxation implications in the hands of either GS-CH or HUL. Right? Given that background, while we will be claiming and depreciating on these assets, it is likely to be contested. Yeah? At the bottom part of the chart is where we are also trying to explain to you, even if we are able to get a depreciation allowance for these assets in taxation books, still there will be no ETR impact.
That is on account of the fact that even when we do get a depreciation allowance, the difference in those assets between the taxation books and accounting books will throw up a temporary difference, and to account for that difference, we will have to recognize a deferred tax liability. Eventually, your effective tax rate is nothing but a combination of your current tax and deferred tax. So even if we get savings in current tax, you will have a deferred tax liability which will go up, and hence, from an overall standpoint, ETR will remain as it is. There will be no ETR impact on account of this merger. Moving on, from a reporting standpoint, the domestic business of Nutrition will be reported under our F&R segment.
And like I had previously disclosed, when it comes to segmental reporting, the exports business as well as the OTC/ OH business will be reported under the other segment, as we had done in the current quarter reporting as well. Srini, with that, I will hand it back to you.
Okay. Yeah. Thank you for that, Amit. So I think that brings to a. It's good to summarize the whole piece. Therefore, when we look at it from a structural opportunity, whether it is growth or in margin expansion, I think the structural opportunity remains intact. Yes, we do have uncertainties from COVID coming through, and that's also true of HUL and the businesses that we are operating in, and that same thing will also be applicable for the Nutrition business. I think we're particularly delighted with the way of the seamless cutover and the successful first quarter.
I think in challenging circumstances, we have been off to a good start. Of course, there is more to really go after. We have spoken about the double-digit growth opportunity into the medium term and the incremental margins over and above what we had talked about. But from a cash perspective, I think it's important to understand that we're seeing the full benefit come through right from day one. Given, I think, and I think Amit explained to you the whole aspect of the share capital premium and therefore the total assets, this will have an implication in terms of the reported ROC and the reported net worth numbers. But I think from time to time, I think it will be good for us to call out and give you the different aspects of the ratios with and without this merger effect for you to appreciate.
But I think in simple terms, it's got no implications in either the way we run the business or in terms of our balance sheet or our ability to really manage the liquidity. I think particularly of relevance and use is the whole OTC/ OH. We have a dedicated team set up within HUL which handles this independently, independent of the category, but to make sure that we realize the full benefits because if we do this well, I think there is a sizable benefit that we can create for GSK, and I think there is a sizable benefit that we can realize for HUL for the reasons that I explained. I think that's broadly what we had to share. I think it will be a good time to now take any questions and over to Amit to get the ball rolling.
Thank you, Srini. We will now move to the Q&A section. The audience has an option of either asking an audio question or you can post your questions online through web option. We will pick up the web options towards the end before we conclude the call. I would like to remind you that this Q&A session is only for institutional investors and analysts. If there is anybody else who is not an institutional investor or an analyst but would like to engage with us, please reach out to our Investor Relations. With that, I will hand it back to you, Rayo. If you can help manage the next session for us, over to you, Rayo.
Sure. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on the touch-tone telephone.
If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have the first question from the line of Abneesh Roy from Edelweiss. Please go ahead.
Hi, sir. Very detailed presentation. Thanks for that. My first question is on the distribution slide which you have given. So your F&R is 1.75x of Horlicks. Your current F&R portfolio, if you see, is much more center of the plate in terms of consumption habit. And in terms of mass pricing also, it is much more on the affordability index versus Horlicks. So when you say 1.75x versus Horlicks in terms of distribution, my question is how much of this is the real universe and how easy is it to reach it?
So in the next two years, is it possible to reach most of that 1.75x target? So one is what is target and how easy is it to reach in the next two years?
I think Abneesh, it's an interesting question. I'm not saying that everything is like for like or comparable. I think the biggest opportunity for us is really going to be when we start to unlock the Sachet portfolio, and then we also start to unlock the Higher Sciences portfolio. The good part is in many, let's say if you really were to look at, let's say, regions like South and East, right? There, I think you actually have got the distribution capability to take it to F&R and actually, in some cases, do beyond. Easily exists. And therefore, I think that will be a very good opportunity.
Clearly, if you see from a North and a West point of view, there will be more work to be done given that the brands are not because South and East are really citadels. So I think that's what that will be more work to be done. So I don't believe that we will be able to capture everything in a two-year time horizon, but I think that is going to be a progressive step up that we are likely to say. But I think we should be able to at least start to get into a good space over the first 12 months, and then I think we will plan from there. But I won't say that in two years' time we will be able to get it exactly the same. But I think structurally, if you do it well, there is ample headroom to play.
Also do remember that there is a very interesting aspect which I spoke on the right side. There is modern trade, and there is e-commerce, then there is a Shakti channel, and some of those are really, really nascent. And I think some of the big opportunity there can be a massive one, much more than what you can do from a direct distribution. Yeah? But in due course, we will keep talking to you guys. I think it's best to take them on a horizon of 12 months, get the job done, and then really talk about the next wave. This is really the beginning of a conversation. It's not necessarily that we'll have all the answers today. Yeah?
And Srini, one follow-up on that, on the sachet again, very good data you have shared. So again, GSK was a very well-run company. Last company had reached x versus say 3x for, say, coffee, what you have done. So here again, what will you do different? Is it largely the distribution skills that will help, or you have some specific strategy which is from what GSK was doing? So that will also help.
So look, you need an end-to-end strategy. It's never just about just going and placing the product in the store. If that is the only definition of success, then all our products will be hero products and we'll win everywhere. I think to really unlock the game, there's a lot of market development. That's the reason we talk about sampling of the magnitude of sampling that we do. Clearly, second is also in terms of just putting the sachet packs in that market.
To be honest, the whole journey from a GSK perspective in sachet was the last two or three years' journey, whereas we have been at it for a fairly long period of time, and you need to do it in a manner which is value-creating for your totality. Yeah? You need to also have the flywheel and the circle that we talk about in various businesses. You need to get the top going well. You need to get the core going well, which then gives you the affordability to really play the sachet game in a financially meaningful manner. I think that's going to be important. The third thing also is going to be a lot in terms of proposition and communication.
I think those are going to be big aspects because end of the day, you also need to create demand, and I think that will also come in. So I think what you really need to do is actually a 360-degree of life with distribution being one enabler. Right. My second question is on the chemist channel. So now VWash is there, and obviously, Horlicks itself is very strong in chemists, plus all those auxiliary. So my question is a bit different in fact. So which part of HUL legacy business will be the biggest beneficiary? Is it the oral care part of the business because Sensodyne is very strong in the chemists, and maybe even the foods portfolio will benefit because skincare is already strong in chemists, and too much of detergent buying anyway doesn't happen there? So is it fair that? Yeah. Yeah. I think BPC will benefit.
I think that's the best way to look at it. I think even, let's say, within skin, given our innovation pipelines and even where we are, I think there is lots of headroom for us to do well. So I think that is going to be one big channel and opportunity.
That's a very broad classification. Within BPC, yeah.
You get lots of skin, which will be a big one. Yeah? That's going to be a massive beneficiary. As you said, VWash, if you bought that brand, we're going to try and make it into a large business. I think that's going to be an important one. Horlicks got a very interesting space, and if you want to play some of the adjacencies which you're not doing as well today, chemist channel becomes an extremely important one. For example, if you want to really dial up dandruff, anti-dandruff, yeah?
Some of the relevance of a chemist channel becomes very, very critical. So there are many aspects within our portfolio where the channel continues to be quite relevant and useful, and that's how we will really play it.
Srini, I had a specific question there. Even Sensodyne is the other benefit.
The other benefit, I think, Aneesh, we also add, is your ability to carry a portfolio to a chemist store actually has got significantly enhanced. Yeah? Because there is always a relevance of how relevant are you to a particular store as a portfolio. I think that's got massive benefits. Right? For example, if you go to a typical GT store, given or give or take whatever, our market shares will be 38%-40% of the branded. That's your relevance. But now with all of these put together in the chemist channel, you become a lot more relevant to that store, and that itself actually then helps you to play the full assortment game. Right.
Just one specific on this. So if you see, Sensodyne is in fact number one in the sensitive segment ahead of the overall market leader. So in oral care, can now there be a coordinated product marketing, product portfolio strategy, not just a relationship or auxiliary selling, which is a very playing well in the relationship? Can there be a much broader, as if you own that brand, can there be a much broader strategy in the future now?
Not at this stage, Abneesh. I think let's be clear. This is really a distribution arrangement that we are doing for them, and we will do a damn good job of it. Yeah? So that's where the nature of the relationship today is.
And the last question, Srini. So I see no mention of foods or say the ready-to-drink. Now, ready-to-drink is doing really well for even the biscuit companies. So what's your strategy on that part of the business? And in the foods, will the Unilever legacy brands be driving foods or whatever notional presence GSK has longer term that will end?
Look, ready-to-drink is an interesting format. I think it's already been test marketed even from, let's say, a Boost perspective in a couple of states in the South. I think we would want to see that for a bit. The test market is happening. I think it's only been a few months there. We want to really learn it. And I think if you really see there is benefit to it, I think we can continue to expand it.
You can take it step by step, yeah. As I said, look, the opportunity landscape, when you see both from a core, whether you see it from a geographical lens, whether you see it from a portfolio, and you see from high-end sciences, there is plenty. I think one needs to be careful and calibrated in terms of what's the size of price that you're going after, the ease of capture, and the time to value. I think we'll have to put these three criteria, and then we will make some of the choices as we go behind this. Okay.
Okay, Srini. That's all for me. Thank you.
All right. Thank you, Abneesh.
Thank you. The next question is from Percy Panthaki from IIFL . Please go ahead.
Hi, team. Good afternoon. My question is this: starting or baseline margin that you're talking about, 31% including royalty and 28% excluding royalty, these are not the margins that I have from the reported results. My margins for FY 2018, 2019, 2020 are 21.6%, 25.3%, and 25.4%, respectively. Can you just elaborate what is this calculation of 28% excluding royalty that you have?
Amit, do you want to just explain the chart? I'm happy to put the chart back up because I thought it was a fairly straightforward one, but apparently it seems not.
Yeah. Okay. So Percy, if you would recall, in the second chart which Srini had presented, the financial results for the year 2019-2020 were not published by GSK. If those results were published, their headline EBITDA number would have been 32.7%.
However, what Srini expressed, there were also some one-time credits which they got and some case settlements which they did under the Amnesty Scheme. If we were to reduce those, if we were to exclude those numbers, then their underlying EBITDA margin would have been 28.1%. So we have pegged our starting line to 28.1%. On that, we have said that there will be a 3% savings on account of royalty because we bought over the Horlicks brand. And that is why then we are saying our starting point for margin expansion further of 550- 700 basis points is pegged to this 28.1% + 300 basis points, 31.1%. I hope that helps.
Yeah. And this 28%, have you carved out the margin separately for the domestic business? I mean, is that the reason why you're having this?
No, no, no. This is for business as a whole. Business as a whole, Percy.
Okay. Okay. Understood. Understood.
You don't have a line of sight to this because these numbers were not published. That's the reason.
But having said that, very happy, Percy, to understand what your numbers are and how it correlates. So then have a conversation with Amit. We're very happy to look at some of the historical numbers in the line of sight.
Yeah. Yeah.
Yeah.
Second thing is on the synergy. You did give a good idea in the call, but I'm approaching it differently because, in fact, you guys also follow a zero-based budgeting approach. So if I follow it from that side and just share out my thought process, so you have a business which is a 70% gross margin business. Maye you have another, let's say, 10 percentage points or so for ad spend, and then you have your overhead, which would include staff and all your other expenses.
Now, these overheads for HUL itself, excluding GSK, staff costs plus other expenses, somewhere around 18 percentage points. Now, obviously, a company which comes into the fold would get synergies because you're sort of having a lot of costs which are redundant. So instead of 18, it should be actually lower than that. So if I take my starting point of 60, which is GM minus ad spend, and then try to deduct the overheads from that, I should actually be getting margins which are much higher than what you are targeting. So where am I going wrong in this?
Mathematically, we can do all of that, Percy, but you also want to grow the business in double digits in the medium term. I think let's also be clear in terms of how do you drive value creation. And therefore, when we looked at the overall business case, we have very clear markers in terms of what are you going to invest in. In some cases, we are actually going to invest in product. We are going to invest in quality. We are actually going to invest in terms of sachet portfolio. We are going to invest in terms of innovations and life sciences that you're going to do. So all of that will also require you to make investments to really realize some of these benefits. So the answer is never a one-sided equation.
If you want to run this as a 2% business, you can always take the margins wherever you want to. And that's exactly what I keep saying even in HUL. If the answer is to only dial up another couple of hundred basis points of margin, you can do that very quickly. But if you really want to run a structural business, you'll have to invest in various silos, and you'll have to get the synergy, and the combination has to work. And that's exactly how we're going to approach this. Otherwise, you'll get a very low numerator and a big denominator.
Yeah. Yeah. Completely understandable. Srini, I mean, just wanting to check if this 550-700 basis points which you're putting forth, is it a very conservative estimate, or you believe it's fairly realistic at this point of time?
So to me, honestly, it's a realistic estimate because I said both sides of the equation need to come in, top and the bottom. And I think we are absolutely being consistent with that. Look, and obviously, if we can do more and we can do better, both on growth and margins, we will go all out. But if I have to give you a position as we stand today, I think there is a good assessment of where we are.
Sure. That's it from me. Thanks and all the best .
Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.
Yeah. Hi. My question is actually again on the sachet part because that seems to be one of the major links to covering the rural penetration story.
So just wanted to understand, based on your learning last two years, 18 months, the sachet business, what is going to be substantially different that you're going to do versus what has happened in the recent couple of years? Because it seems that while it's grown well, it's still a very small contributor, and it's very gradually increasing share. So is it an easy unlock like it has been in some other categories where sachets have exploded, or does this look like a category where it will be a much longer haul and it will have to because the promise of the category is regular usage, which leads to better health? So wanted to get some thoughts on that.
So I think the answer is somewhere in between. Yeah? So if you see, and again, this is where I need to be careful. I think when it was being run within the GSK, while there was an understanding and appreciation of the importance and the relevance of sachets, there was only so much done really to really build and develop it. Yeah? For various reasons. It could either have been the distribution strength, it could have been the margin expectations and how they do it, and it's not playing really the full portfolio in its entirety the way we would want to do.
Similarly, if you also want to look at market development, and I think we've talked about it in many, many cases, saying that it's just not about going and putting it out there. It's also about the whole market development model in terms of sampling, getting people to try the product, explaining the benefits, whether it's a rural contact program or really the kind of work that we do. Yeah?
That's why we've done more than INR 17 crore of samplings over the last few years in terms of trying to build that. I think that's going to be super, super critical, and in that, you'll also have to think about how do you activate some of this very differently, and I think that's going to be a big learning, and even if you see in our case, wherever we have built the Sachet businesses, these are progressive step-ups. It's not as if you come in in one year because you have access to the stores, you load the product, and it takes off. I think it's a great way to get people into the category for them to understand what it means, and then it gets into a regime and a habit of how you play.
And the last element you also see is that, look, people will come in, but it takes sometimes for them to keep buying into sachets and keep using it because they're also managing cash. It's just not about affordability because people do spend a lot of money when it comes to their children, kids, and health. But it's also about being able to manage the ticket size and come to it, and sachets also come into play there. So a combination of all of this is what you need to do, and you need to do them consistently. And therefore, it does take a bit of time. But I think we can do definitely significantly better than where it was, but realizing the full potential will take some time.
Thanks. And one question was on the royalty. So now that the business is running, what's the level of royalty or, let's say, shared services, technical, whatever you pay on this part of the business? So that 3% royalty which you added back, is it also going away in terms of some additional royalty now?
No. So look, there is one aspect which I think we need to formalize, subject to the approval of the Board and Audit Committee, is the central services fee. Yeah? Because as far as the brand and the tech components are concerned, that's clearly we own the brand, and therefore, there will be no payouts which are happening on that account. I think the aspects which are work in progress is really some of the central services fee could be about 1% or lower. And that's something which is in discussion.
But to be honest, in the overall scheme of things, with the size of price we are going after, once we pass the governance muster, that may come into play. But that's not something which worries me from the totality of the margin profile that we will drive.
Sure. Thanks. That's it from my side.
Srini, conscious of time, we will have time for one last question, and then maybe we can take the others offline.
No, absolutely. Absolutely. Yeah.
Thank you. We take the next question from the line of Prasad Deshmukh from Bank of America. Please go ahead.
Thanks, Srini, for the presentation. Just one question. When the presentation did talk about a lot of operational aspects of it, could you just, within the scope that you can, comment on how different the two companies have been culturally in the past, and how does the integration happen from people's perspective now?
So look, I think good part is in many respects. And it's a very important question, and I thank you for raising it because in trying to tell the markets about the growth and margins, I think the most important element is the connecting tissue. And therefore, in some respects, I think the companies are very similar when it comes to values in terms of meritocracy, in terms of what you want to do and get done. I think that's a great fit, and that's a great connect in terms of where we start with. So I think that's a big tick.
Second, I think, is also an important element. There is a very good appreciation and understanding of brands and consumers which are there on both sides. And therefore, that is also a big tick because you need people to understand consumers and consumer centricity to really like and to really build these businesses. I think that's a great one. That really helps. I think the areas of opportunity is that, for example, I think we are a well-connected organization, whether within India or within Unilever. That is something I think people in GSK are waking up to and realizing. I think that is something we are working together, and I think we are rediscovering the joys of that. The second thing I think they'll also realize is that I think we are a lot more nimble and speed and responsiveness in terms of how we operate.
I think these are also the aspects which we have been connecting and working with the GSK teams. The good news is we have been in constant touch and engagement. This is not something which is only happening from 1 April because that's when the legal merger happens. But in terms of connecting with the people, in terms of understanding and appreciating and explaining to them what Unilever is all about, we have been at it for more than one year. Yeah? So there's been a functional-to-functional connect. There's a top-to-top connect. And there's a very, very clear onboarding which has happened over a period of time with all of these people.
The great part is some of the pulse checks and the surveys also show us that the mood and the sentiment in the team which has joined us and become part of one Unilever is in a great space. So to be honest, not many concerns. I think the aspects which we need to continue to work will be the speed, agility, responsiveness, and the pace at which we operate is something that I think we just have to work together. But otherwise, I think our starting point is a great one. And the mood and the sentiment is absolutely in the right space.
Got it. And the HR organizations are aligned in the sense that it's one.
Absolutely. Look, it's now one organization. Yeah? And that's how we have been running it. It's one part of our CCBT. And already, we've started to move people.
I think the interesting part we'll also realize is we've had people moving both ways from nutrition have come into different functions, including my own finance team. So across all the functions. And I think we've already started to see some of that cross moves already happening. And I think it's all goes very well. Yeah? In fact, some of the sales teams have started to completely intermingle. And I think that that movement of people has already started, which all goes extremely well for us. Yeah?
Got it. Got it. Thank you.
All right. Superb. So sorry for that. I think we're really run out of time. I think there are also some questions which have been on the web. Amit will try and find a way of connecting with some of you to answer them. Hopefully, some of the aspects we've already covered.
This is going to be an ongoing conversation. I think at this stage, it was important to give a perspective of how we see the synergies both from a growth point of view as well as margins. I think really responding to Prasad's question about the whole culture. I think all the three dimensions, I think we're in good space. I think that's why if I were to use Sanjiv's words, I think it's a marriage made in heaven, and we are super excited with the possibilities. Yeah? Thank you for that. We will connect again in due course.
All right. So with that, we will conclude the Q&A session. A copy of this presentation, if it's already not with you, is available on our website. You can refer to that. And thank you, Srini, and thank you everyone for your participation. Stay well. Stay safe. Thank you very much.
All right. Bye-bye.
Thank you very much. On behalf of Hindustan Unilever Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.