1. Sector Landscape and Outlook
 

UK's Hygiene and Personal care products are in a unique position to make a difference in the world amid the omnipresence of novel COVID-19. Globally recognised top hygiene and personal care products which includes several household names like Dettol, Harpic, Lysol, Mortein, Gaviscon, Air-wick, Lifebuoy, Lipton, Domestos, Aquafresh, Clearasil are all from the UK.

Coronavirus pandemic is set to drive the market for hand sanitizer, masks, and other hygiene and personal care  products in FY20. WHO recently declared the coronavirus a global pandemic, as the spread of the deadly virus has now marked its footprint in approximately 146 countries.

Fig 1: World Health Organisation (WHO) Coronavirus Worldwide Impact (as on 16 March 2020)

 
Source: WHO

With around 165,000 total confirmed cases and the death toll spiking to nearly 6,500, the demand for hand sanitizer, masks, and other cleanliness and wellness products has significantly surged. In many countries, demand for these hygiene, personal care and home care products have superseded supply, and global health and hygiene companies have rushed to increase production to maintain the adequate supply. 

This spike in demand for hygiene and healthcare products is all set to drive revenue, and profitability in FY20 for manufacturers, also, stocks of hygiene and healthcare sector have relatively outperformed broader market indices and managing to sustain amid bloodbath in the global financial market. Further, the spurt in demand for their offerings is likely to support these companies’ stocks in near-term.

Let’s now have a look at the demand driver that has come as a big surprise for the companies involved in this sector.

Black Swan (2020): COVID-19: The global economy entered into 2020 with a myriad of issues such as- elevated tensions with the Middle East and North Korea, a high-stakes election year in the US, and limited monetary policy levers left in several major economies to fight the next downturn amid ongoing growth worries. But the event that no one expected was the outbreak of COVID-19, that first emerged in the populous city of Wuhan, China, and which is now proving to be both more infectious and virulent than the common flu. As a result, China implemented an unprecedented lockdown of much of the country in late January, impacting almost all commercial activity in the world’s second-largest economy, with knock-on effects to global supply chains just beginning to emerge.

The Chinese authorities have been able to flatten the coronavirus new cases and the economy is starting to limp back to life, the situation in Europe has started to escalate with Italy being the epicentre. Coronavirus is on Top of Mind of every policymakers across the globe.

On 11 March 2020, the World Health Organisation (WHO) recognised COVID-19 as “pandemic”, the WHO generally uses the term “pandemic” when a major infectious disease is spreading within communities on multiple continents. It denotes the highest level of concern. The dilemma with this coronavirus is that while cases have now been identified on multiple continents, the number of cases we know about is relatively small in most places. That said, there are almost certainly lots of cases we don’t know about. So, on the one hand, you could say it is a pandemic, and we believe that the public health community everywhereis treating it as such.

Now let’s have a deeper understanding of the demand and impact on the profitability for the companies operating in this segment

Hygiene, Personal Care and Home Care demand expectation turned boom for 2020: Demand for hand sanitiser, hand wash, air pollution masks and other hygiene, personal care and home care products have leapt up significantly post the outbreak of virus. The disinfectants are considered as a precaution against the deadly virus and protection against the spread of the diseases. In China, and other Asia Pacific countries demand for hand wash, and sanitisers gels have outstripped supply, which led manufacturers to rush to increase production and cater the demand.  Washing hand with a disinfectant like soap and liquid is a key essential message promoted by international healthcare organisations and state government in the face of the virus outbreak. 

Cost efficiency measures at the fore- Oil prices slumped to multiyear lows and a Low-Interest rate regime

             
Source: Thomson Reuters       

Chemicals, plastic, packaging and logistics costs are major cost base for hygiene, personal care and home care businesses and the majority of them are oil-derivatives and oil-intensive expenses. So, an unprecedented slump in oil prices is set to benefit manufacturers in short-term as well as in long-run. Crude oil prices hovering in $30-$40/bbl range from $55-$60/bbl range in a month, and a spike in demand leading to economies of scale should help the manufactures of manufacturers to achieve margin expansion.

Also, an already lower interest rate regime accentuated by the emergency rate cut by the US Federal Reserve, followed by Canada, Australia and the UK, has made credit availability even cheaper. The significant rate cut by US Federal Reserve since 2008 financial crisis is in line with Central Bank's strategy to bring stability in the financial markets and making credit costs as low as possible as businesses and economy stare at a possible recession.

Profit expected to register healthy growth in 2020: The positive demand outlook for hygiene, personal care and home care products, amid lower oil prices and record low-interest rate regime, together will increase profitability for disinfecting manufacturers. Gross margin, EBITDA margin and net margin are expected to be higher for FY20. Return ratios are also expected to improve in FY20.

Hygiene, Personal Care and Home Care sector witnessed a muted growth in FY19, because of muted demand and lower economic growth across the world, primarily led by US-China trade spat. However, since the outbreak of this deadly virus has given a boost to demand for disinfectant products, and also a number of buyers of these products are not a regular one, rather new customers are buying and hoarding large quantities of hand wash, sanitiser, mask and other product in the face of the recent event.

Let’s have a look at how the companies operating in this segment have performed as against the benchmark index on the stock exchange.

Figure 4: Hygiene and Personal care stocks relatively outperformed amid market Bloodbath


Source: Thomson Reuters, 1-Month Relative Price Performance

Consumer staples true to their perceived ‘lesser risk nature’ have beaten the benchmark on relative terms as established by the above charts. The benchmark index FTSE is down 31.21% in the past one month, while the worst performing stock Unilever (ULVR) albeit down by 19.52% has beaten the index by ~12 percentage points. 
 
II. Investment Theme and Stocks under Discussion (RB., ULVR, PZC and MCB)

After gauging through the key trends, driver and stance, let’s take a detailed view of the companies in the hygiene, personal and home care Industry in terms of their performance and outlook. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).

Fig 11: Relative performance of the stocks under discussion in last 1 year (Indexed to 100)