HUL's acquisition of MDH could be a win-win deal

The country's largest fast moving consumer goods (FMCG) company HUL's latest bid to acquire popular spice maker MDH could prove to be beneficial for both the entities.

After completing its successful merger of health drinks major GSK Consumer Healthcare in 2020, the Mumbai-headquartered firm is now in talks with the Delhi-based MDH Group that lost its founder about a year ago. As per estimates, the deal could turn out to be one of the largest in the sector since the GSK acquisition. 

With Rs 1,191 crore in yearly sales (FY2021) and Rs 507 crore operating profit MDH is already enjoying a 42.5 per cent EBITDA margin -- much higher than HUL's 25.2 per cent. Thus, if the deal goes through addition of MDH in HUL's vast portfolio would not only help it entered an uncharted territory of branded spices but it would also help improve its margins further.

According to Edelweiss Securities, being category leader, MDH "has top tier margins due to huge economies of scale in sourcing and selling". Further, the high trust that it enjoys among consumers and its premium pricing, compared to regional players, are its key advantages. 

Citing the last such deal in the branded spices market, the analyst firm indicated towards a significant boost in pricing of the firm. The acquisition of Sunrise Foods -- a prominent player in the spices market in Eastern India, by Kolkata-based ITC Ltd. came at a cost of Rs 2,150 crore, valuing the company at nearly 25 times the previous year’s operating profit of Rs 88 crore. Its revenue was Rs 591 crore at the time. 

MDH has huge land parcels in prime locations in the capital worth crores, which makes it a more attractive proposition.

While HUL's massive presence across physical retail outlets -- nearly 8 million in total and higher than any other FMCG player -- leaves headroom for growth for the brand MDH.

Also read: HUL in race to buy majority stake in MDH Spices; stock tanks 4%