Hindustan Unilever - result update-Oct-15-EDELbreport.myiris.com/ES1/HINLEVER_20151014.pdf · Hindustan Unilever’s ... 9‐quarter low EBIT margin in soap and detergents ... Lifebuoy

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Hindustan Unilever’s (HUL) Q2FY16 numbers came in line with our estimates. Key positives: (i) adjusted 6.5% YoY domestic volume growth (reported growth was 7% YoY due to upstocking done in anticipation of transport strike); (ii) 9.5% YoY growth in personal products (PP) with 17.2% YoY growth in EBIT; (iii) 8 quarters of double‐digit YoY growth in packaged foods (PF); and (iv) 316bps YoY gross margin expansion led by cooling inflation in commodity basket (PFAD prices down 28% YoY) and cost saving program (~70bps). Key negatives: (i) softer EBITDA margin expansion given 24‐quarter high A&P spends (as a % of sales); (ii) 12‐quarter low EBIT margin in beverages (HUL is working on cost savings); and (iii) 9‐quarter low EBIT margin in soap and detergents (S&D) due to part passage of commodity benefits to counter intense competition and support innovations. Maintain ‘HOLD’.

Robust volumes make up for fiscal headwinds, price deflation

Fiscal headwinds impacted sales growth by 100bps and EBIT by 45bps. Price deflation

was seen in S&D, while the remaining portfolio saw modest price increase. In S&D,

premium brands performed better than mass brands. Wheel and Close‐up (struggling

earlier) witnessed improvement; actions are being taken in Pepsodent. Hair care saw

strong double‐digit volume led growth despite fiscal headwinds, price cut in shampoo.

Key takeaways from conference call

In rurban areas, the mix is very similar to Tier 2 and 3 cities. While rural growth was

~1.5x, urban growth came at par; rural outlook is uncertain given erratic monsoon, but

HUL believes rural growth has hit a bottom. The company is committed to modest

improvement in margins with volume‐led growth. Ayush is being re‐launched with

aggressive promotion in Ecommerce (exclusive one month tie‐up with Amazon, later to

be more widely available) to be followed by innovation pipeline.

Outlook and valuations: Long term positive; maintain ‘HOLD’

We remain positive on long‐term prospects of HUL, led by both margin and volume

recovery. Key risks—intense competition and moderation in rural demand—are

increasing. At CMP, the stock is trading at 38x FY16E and 33.2x FY17E EPS. We maintain

‘HOLD/SP’ on the stock with target price of INR865.

RESULT UPDATE

HINDUSTAN UNILEVERVolumes skirt deflationary pressures

EDELWEISS 4D RATINGS

Absolute Rating HOLD

Rating Relative to Sector Performer

Risk Rating Relative to Sector Low

Sector Relative to Market Underweight

MARKET DATA (R: HLL.BO, B: HUVR IN)

CMP : INR 797

Target Price : INR 865

52‐week range (INR) : 981 / 707

Share in issue (mn) : 2,163.9

M cap (INR bn/USD mn) : 1,725 / 27,039

Avg. Daily Vol.BSE/NSE(‘000) : 1,612.4 SHARE HOLDING PATTERN (%)

Current Q1FY16 Q4FY15

Promoters *

67.2 67.2 67.2

MF's, FI's & BK’s 4.8 4.2 3.8

FII's 13.9 14.6 15.0

Others 14.1 14.0 13.9

* Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty

EW Consumer Goods Index

1 month 2.5 4.5 5.5

3 months (9.5) (2.6) 2.9

12 months 13.1 3.6 8.9

Abneesh Roy +91 22 6620 3141

[email protected]

Pooja Lath +91 22 6620 3075

[email protected]

Tanmay Sharma +91 22 4040 7586

[email protected]

India Equity Research| Consumer Goods

October 14, 2015

Financials (INR mn)

Year to March Q2FY16 Q2FY15 % change Q1FY16 % change FY15 FY16E FY17E

Net rev. 79,554 76,393 4.1 81,051 (1.8) 319,722 350,689 395,896

EBITDA 13,259 12,420 6.8 15,064 (12.0) 54,137 64,685 74,264

Adjusted profit 9,703 9,569 1.4 10,527 (100) 36,839 45,384 52,023

Dil. EPS (INR) 4.5 4.4 1.3 4.9 (7.8) 17.0 21.0 24.1

Diluted P/E (x) 46.8 38.0 33.2

EV/EBITDA (x) 30.9 25.7 22.3

ROAE (%) 97.2 106.2 108.6

* Quarterly nos. standalone; annual nos. consolidated

Consumer Goods

2 Edelweiss Securities Limited

Table 1: Performance trend across categories at a glance

Source: Company, Edelweiss research

Q2FY16 concall | Key takeaways

Environment: Overall growth was led by volumes amidst deflationary price environment. In

both rural and urban markets, it was similar environment and hence the company remains

focussed to drive profitable volume growth.

Overall volumes and growth: HUL reported underlying volume growth of 7% YoY. Volume

growth was higher by 50bps YoY due to increased volume in pipeline owing to the transport

strike. Adjusted for this, volume growth would have been close to 6.5% YoY. There exists

room for improvement in volume growth. Deflation has taken place in universally

penetrated categories. In 2008, amid benign commodity environment the company posted

negative volume growth (volumes fell 7‐8%) just because it was 6‐months slow in taking a

price correction. Over the long term, HUL expects the correlation in growth and GDP to be

1:1.

Rural and urban: Even in rural India the product mix has improved. In rurban areas, the mix

is very similar to Tier 2 and 3 cities. The tendency to migrate to premium brands is much

higher in a benign commodity environment. Rural growth needs to be watched with

monsoons being challenging. Rural growth, which was running at 1.5‐1.7x that of urban, has

come to similar levels now. The outlook for rural remains uncertain and the company

witnessed stress in rural areas in Q2FY16. It believes the decline in rural growth is now at the

bottom and appears to have bottomed out.

Cost savings: Out of the 320bps YoY gross margin expansion, ~70bps YoY expansion has

come from the cost saving program.

Elasticity: Elasticity of volume growth is lower in high penetrated categories.

Pricing: If the commodity prices remain constant, then once anniversarisation happens the

price decline will erase and with price growth in other portfolio will increase overall price

growth. Once commodity prices move up, HUL will be well poised to pass on the price

% sales growth (YoY) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Soaps and detergents 23.7 22.3 19.8 12.6 7.7 6.4 7.1 9.6 12.9 11.1 6.0 5.0 0.2 1.6

Personal products 16.7 12.1 13.0 12.1 2.0 11.8 12.4 8.3 14.7 9.9 6.5 13.4 11.4 9.5

Beverages 7.4 10.0 18.2 18.3 15.8 16.1 7.2 7.5 10.5 7.5 8.2 12.3 9.4 6.1

Packaged Food 17.3 10.2 7.7 7.0 4.8 8.7 12.9 12.7 18.8 13.4 12.6 13.6 11.8 12.4

Overall volume

growth (% YoY)9.0 7.0 5.0 6.0 4.0 5.0 4.0 3.0 6.0 5.0 3.0 6.0 6.0 7.0

% EBIT growth (YoY) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Soaps and detergents 63.2 41.2 10.6 19.7 14.0 4.5 14.5 10.1 21.1 7.9 11.4 15.8 12.4 (4.1)

Personal products 15.1 6.6 19.0 3.6 (1.6) 5.3 13.9 5.1 27.4 17.4 3.3 26.0 19.5 17.2

Beverages 25.9 17.5 33.5 38.4 46.1 37.5 (2.2) 19.7 (1.8) 9.9 2.7 11.4 5.3 (11.5)

EBIT margins (%) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Soaps and detergents 12.2 14.3 12.4 12.0 12.9 14.0 13.3 12.1 13.8 13.6 14.0 13.3 15.5 12.8

Personal products 25.8 24.2 28.3 25.8 24.9 22.8 28.6 25.0 27.6 24.4 27.7 27.8 29.6 26.1

Beverages 14.5 14.3 17.7 16.9 18.3 17.0 16.2 18.8 16.3 17.3 15.3 18.6 15.7 14.5

Packaged Food 5.7 0.2 (0.8) 3.8 8.4 3.3 (3.6) 5.5 10.9 4.4 (5.1) 5.3 8.9 5.3

Hindustan Unilever


increase which is helped by the benefits arising from the Winning in Many India strategy.

Benign pricing also helps premiumisation of the portfolio, which will lead to better mix and

hence better growth. Higher growth in PP will help better mix and margins. The company is

committed to modest improvement in margins in all scenarios. 50% of the portfolio (S&D)

has seen price deflation with the other half witnessing price increase.

Soaps and detergents (S&D): This segment witnessed growth of 1.6% YoY (3% YoY ex of

phasing off excise duty benefits), while EBIT declined by 4.1% YoY. Dove, Pears, Hamam and

Lifebuoy saw double digit volume growth. Growth in laundry segment was led by Surf (one

of the strongest growth momentum in Q2FY16) and Rin. Growth in this segment was

impacted by phasing out of excise duty and price deflation owing to soft commodity prices.

Wheel performance saw improvement. Premium brands fared better than mass market

brands. HUL has re‐launched Lux in a significant manner and whenever relaunch is done

pipeline correction takes place which temporarily impacts volume growth. Retention level of

Dove by the customer is very high. S&D has seen significant gross margin expansion so the

company has used the benefits for developing the market and brand investment.

Personal products (PP): The segment reported growth of 9.5% YoY (11% YoY ex phasing off

excise duty benefits), while EBIT growth came in at 17.2% YoY with 171bps margin

expansion. Fair and Lovely continued to do well, while performance of Pond’s was led by

premium skin lightening and Lakme by Perfect Radiance and CC cream. HUL’s hair care

segment saw strong double‐digit volume‐led growth (strong double‐digit growth despite

excise correction and price cuts in shampoos) across format with good performance by Dove

and TRESemme. Hair care has seen growth across formats. Oral care recovery is in progress.

Close Up saw double digit growth (helped by activations), while performance of Pepsodent

was subdued. However, the company is confident of turnaround happening in Pepsodent in

couple of quarters (HUL is aware of the area where improvement is required). Lakme

delivered double digit growth across core, Absolute and 9 to 5 ranges.

Shampoo: The company accounts for 50% of the hair care market. Shampoo witnessed

significant pick up in volumes.

Deodorant: Saw one of the largest innovations for the company and met with very good

response.

Beverages: Growth in this segment came in at 5.9% YoY with EBIT declining by 11.5% YoY.

Margins fell by 285bps YoY. Red Label continues to lead category performance, while Taaza

(taken price corrections) saw pick up. Growth in green tea continues. Growth in coffee was

led by Bru Gold. The impact on margins was due to: (i) tea has seen some inflation; and (ii)

A&P spends have increased in this segment. Tea growth has been 50‐50 in terms of volume

and price. With pipeline correction in Taj and alignment in costs, growth in tea will be back.

Packaged foods: This segment saw double digit growth (eighth successive quarter of double

digit growth) of 12.4% YoY with 34.5% YoY EBIT growth. Growth was driven by all the key

brands ‐ Kissan sustained robust activation‐led growth across both ketchups and jams, while

Knorr growth was led by strong performance by instant soups. HUL has a lot of new offerings

in the pipeline in this space.

Water: This business was helped by performance of the Ecommerce channel. Overall

performance was however, subdued.

Consumer Goods


A&P: HUL has done substantial investment and recorded one of the highest A&P quarter.

A&P expenses increased by 225bps YoY moving up 23.8% YoY. Higher A&P signifies

commitment towards building the market and passing on benefits to consumers. A&P

increase was also due to the fact there was higher innovation in the S&D segment in

Q2FY16. The company has been investing for market development so that the mix

improvement continues. A&P spend will depend on competitive scenario and affordability.

TV spends, which used to be 90%, is now down to ~70% as digital spends have increased.

The increase was uniform in advertisement and promotion.

Competition: Competitive intensity continues to remain high. HUL is agile in responding to

market by making sure that it protects it share. The company is seized of the fact that the

commodity cycle changes at a faster pace these days.

Excise impact: Phasing off of the excise benefit impacted revenue growth by 100bps YoY (ex

this, underlying growth would have been 6% YoY). On EBIT, the impact was 45bps YoY. Tax

rate increased by 189bps YoY. The impact will continue till early part of Q4FY16, though the

impact will taper off. The impact in Q3FY16 can be 70‐80bps and 30‐40bps YoY in Q4FY16.

Toni and Guy: HUL is satisfied with performance of this brand till now.

Ayush: This brand was launched in 2000’s but that launch was ahead of time. Now is a

correct time to launch. Initially, HUL will only go for Ecommerce launch and has a lot of

innovation and new launches here. It is already launched in Amazon and will be extended to

other Ecommerce companies as well.

Commodity costs: Remains benign. PFAD has dipped to average price of INR31.9 per kg from

INR41.6 in Q1FY16. Commodity price collapse has happened and is now stabilising.

Taxation: Will remain in the region of 31.5%. From FY17, the increase in tax rate will

stabilise.

Debtor days: Have risen because of the change in the mix of the channel with higher growth

in modern trade and CSD. The increase is not because of the credit crunch in the rural

market.

Q1FY16 concall | Key takeaways

Market environment: Management believes the pace of market recovery will be largely

dependent on rural areas. Rural has witnessed some slowdown recently; rural and urban

growth rates are now at par. Rural growth should ideally outpace urban growth because

70% of the Indian population resides in rural areas, while it represent only one third of the

market.

Market data is showing some discrepancy as it is reflecting pricing growth in the S&D space

which is not true. HUL believes there is some lag in correct reflection of pricing action (price

cut which HUL took in December 2014 in S&D is likely to reflect with 9 months’ lag).

The rural share of income for the company is 40‐45% including indirect coverage and ~35%

for direct coverage.

Hindustan Unilever


Phasing of fiscal benefits: The impact during Q1FY16 was 170bps YoY on top line and 65bps

on PBIT. Fiscal phasing impact will fade by 50bps every quarter each in Q2FY16 and Q3FY16;

from Q4FY16 it will come into base. The impact is predominantly soaps and personal

products category.

HUL will pass on the impact on phasing out of excise benefit in a phased manner at an

appropriate time.

Volume growth: HUL registered volume growth of 6% YoY ahead of the market.

Soaps and detergents (S&D): The S&D portfolio was flattish YoY (2% YoY ex‐fiscal headwind)

while margin in this segment expanded 169bps YoY. Volume growth is extremely healthy

across S&D.

Growth in the skin cleansing category was driven by premium soaps, double digit volume

growth in Dove and liquid handwash led by Lifebuoy. Mass soaps segment is facing some

slowdown pressure led by rural slowdown; HUL is taking actions to improve growth in this

segment. Though many small players have mushroomed in the soaps space with raw

material deflation, the company has not lost share to them. HUL’s effective price deflation

in S&D was 2% YoY in Q1FY16.

Surf saw volume led double digit growth while performance of Rin in bars and powder was

also strong. Wheel continues to remain soft aggravated by a slowing mass market, but the

company remains committed towards the brand which is INR25bn brand for the company.

Rural slowdown has had a significant bearing on Wheel’s performance, further aggravated

by price volatility due to reducing raw material prices. The core issue has been sorted out

and execution will reflect in 3‐6 months.

Personal Products (PP): PP portfolio registered strong growth of 11.4% YoY (15% YoY ex‐

fiscal headwind) while margins in this segment grew a robust 201bps YoY.

Skin care portfolio saw double digit growth in FAL, Ponds, Lakme, Vaseline. Growth in Pond’s

was led by premium skin lightening and talc. This category showed strong performance

despite phasing out of excise benefits.

Hair care also delivered double digit growth across brands and formats. This category

showed strong performance despite phasing out of excise benefits.

Close Up clocked double digit growth driven by activations and micromarketing while

growth in Pepsodent was driven by Gum care and Clove & Salt variants. Pepsodent continues

to perform below company expectations. HUL has taken corrective action, likely to bear fruit

in 3‐6 months.

Lakme sustained strong performance led by premium make up.

Margin improvement was led by reduction in packaging costs (constitutes significant cost in

PP) due to correction in crude oil prices and leverage coming into play on A&P costs which

are largely fixed in nature for PP category. Modest margin improvement should continue.

Beverages: Beverages revenue increased 9.4% YoY, while margins declined 60bps YoY. Tea

segment delivered double digit growth with healthy volumes. High growth momentum was

Consumer Goods


sustained in Lipton Green Tea and Red Label. Coffee growth was led by more than 2x growth

in Bru Gold. Retail coffee sales have done well, though sales could have performed better.

Packaged foods: Packaged foods delivered seventh consecutive quarter of double digit

growth at 11.8% YoY. Kissan delivered one of the strongest quarters led by both ketchups

and jams. Kwality and Magnum delivered good growth. Knorr exhibited strong growth

despite Nestle issue.

Gross margins: Gross margins rose 376bps YoY.

A&P spends: A&P spends increased by 22% YoY to support innovation and to remain

competitive. A&P was especially high in the S&D space. Both ad and promotion grew and

the ratio was largely maintained YoY.

Other costs: Royalty increase (40bsp YoY) impact was largely offset by saving in supply

chain.

Outlook and valuations: Long term positive; maintain ‘HOLD’

We continue to remain positive on HUL's ability to grow ahead of the market and its pricing

power due to initiatives in distribution expansion (direct coverage increased from 0.9mn in

2009 to 3.2mn in 2013) and product innovations. Commodity price correction will continue

to aid gross margin expansion in FY16, though we expect partial benefit to be continued to

be passed on to customers via promotional offers/select price cuts to keep competition at

bay. Cost savings and mix improvement will help margins to improve structurally.

With likely urban recovery, the company (higher urban exposure at 55%) is well placed to

benefit. We expect higher investment in A&P to support brand equity, aid market

development for future categories and to counter pick up in competitive intensity. Key

monitorables: (i) rural growth which may moderate due to erratic rainfall, slowdown in rural

wage growth, muted hikes in support prices for crops; and (ii) increase in competitive

intensity due to softer commodity prices. However, with an anticipated recovery in urban

demand and commodity correction to aid EBITDA margin expansion, we expect HUL to

potentially benefit. We maintain target P/E of 36x FY17E EPS arriving at a target price of

INR865. We maintain 'HOLD/ Sector Performer'.

Hindustan Unilever


Chart 1: Overall volume growth at 7% YoY

Chart 2: A&P spends up 225bps YoY

Chart 3: Category‐wise contribution—Sales


0.0

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(% o

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Soaps and Detergents

48%

Personal Products30%

Beverages12%

Packaged Food6%

Others (includes Chemicals, Water etc)

4%

Q2FY16 revenue split


49%


Beverages12%

Packaged Food6%


5%

Q2FY15 revenue split

Consumer Goods


Chart 4: Category‐wise contribution—EBIT

Chart 5: S&D YoY revenue up 1.6% YoY Chart 6: S&D margin down 77bps YoY

Chart 7: PP revenue growth at 9.5% YoY Chart 8: PP margin up 171bps YoY



38%


Beverages11%

Packaged Food2%


1%

Q2FY16 ‐ EBIT contribution

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42%


Beverages13%

Packaged Food1%


1%

Q2FY15 ‐ EBIT contribution

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(PP margins %)

Hindustan Unilever


Chart 9: Beverages sales at 5.9% YoY Chart 10: Beverages margin down 285bps YoY

Chart 11: PF sales growth grew by 12.4% YoY Chart 12: PF margins up 87bps YoY

Chart 13: Palm oil prices trend


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(Beverages margins %)

Consumer Goods


Table 2: Segmental performance


Chart 14: One year forward P/E chart

Source: Edelweiss research

Year to March ‐ Revenues (INR mn) Q2FY16 Q2FY15 YoY growth Q1FY16 QoQ growth

Soaps and Detergents 38,166 37,551 1.6 38,544 (1.0)

Personal products 23,456 21,427 9.5 24,056 (2.5)

Beverages 9,526 8,991 5.9 9,149 4.1

Packaged food 5,071 4,513 12.4 6,079 (16.6)

Others (includes chemicals, water etc) 3,243 3,618 (10.4) 3,125 3.8

Segment results (Profit/(Loss) before tax and interest)

Soaps and Detergents 4,903 5,112 (4.1) 5,980 (18.0)

Personal products 6,119 5,223 17.2 7,130 (14.2)

Beverages 1,378 1,557 (11.5) 1,435 (4.0)

Packaged food 269 200 34.5 544 (50.6)

Others (includes chemicals, water etc) 104 116 (9.9) (46) NM

Segment margins

Margin (%)

Soaps and Detergents 12.8 13.6 (77) 15.5 (267)

Personal products 26.1 24.4 171 29.6 (355)

Beverages 14.5 17.3 (285) 15.7 (122)

Packaged food 5.3 4.4 87 8.9 (365)

Others (includes chemicals, water etc) 3.2 3.2 NM (1.5) NM

100

300

500

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900

1,100

Oct‐10

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Oct‐15

(INR)

20x

40x

45x

25x

30x

35x

Hindustan Unilever


Financial snapshot (INR mn) Year to March Q2FY16 Q2FY15 % change Q1FY16 % change YTD16 FY16E FY17E

Net revenues 79,554 76,393 4.1 81,051 (1.8) 160,605 350,689 395,896 Cost of goods sold 38,995 39,590 (1.5) 39,020 (0.1) 78,015 170,276 192,570

Gross profit 40,559 36,804 10.2 42,031 (3.5) 82,591 180,413 203,327

Staff costs 3,808 4,130 (7.8) 3,635 4.8 7,443 18,587 20,191

Advt. sales & promotions 11,450 9,251 23.8 11,534 (0.7) 22,984 44,888 49,487

Other expenses 12,042 11,003 9.4 11,798 2.1 23,840 52,253 59,384

Total expenditure 27,301 24,383 12.0 26,967 1.2 54,268 115,727 129,062

EBITDA 13,259 12,420 6.8 15,064 (12.0) 28,323 64,685 74,264

Depreciation & amortization 761 764 (0.3) 749 1.6 1,511 3,333 3,603

EBIT 12,497 11,657 7.2 14,315 (12.7) 26,812 61,352 70,661

Other income 1,702 1,978 (14.0) 1,086 56.7 2,788 5,715 6,190

Interest ‐ 63 (99.5) 1 (57.1) 1 150 150

Add: Prior period items ‐ ‐ ‐ ‐ ‐ ‐

Add: Exceptional items (81) 312 NA 65 NA (16) 65 ‐

Profit before tax 14,199 13,571 4.6 15,400 (7.8) 29,599 66,916 76,701

Provision for taxes 4,495 4,002 12.3 4,874 (7.8) 9,369 21,413 24,544

Minority interest ‐ ‐ ‐ ‐ 119 134

Share in profit from associates ‐ ‐ ‐ ‐ ‐ ‐

Reported net profit 9,622 9,882 (2.6) 10,591 (9.1) 20,214 45,449 52,023

Adjusted Profit 9,703 9,569 1.4 10,527 (7.8) 20,230 45,384 52,023

Adjusted Diluted EPS 4.5 4.4 4.9 9.4 21.0 24.1

As % of net revenues

COGS 49.9 53.0 48.9 49.4 49.8 49.8

Employee cost 4.9 5.5 4.6 4.7 5.4 5.2

Adv. & sales promotions 14.6 12.4 14.5 14.6 13.1 12.8

Other expenditure 15.4 14.7 14.8 15.1 15.3 15.4

EBITDA 17.0 16.6 18.9 17.9 18.9 19.2

EBIT 16.0 15.6 18.0 17.0 17.9 18.3

PBT 18.2 18.2 19.3 18.7 19.6 19.8

Reported net profit 12.4 12.8 13.2 12.8 13.3 13.5

Tax rate 31.7 29.5 31.6 31.7 32.0 32.0

Consumer Goods


Company Description

HUL, the largest FMCG Company in India, was formed by merging three subsidiaries of

Unilever in 1956. At present, Unilever Plc holds a 67.2% stake in the company. HUL’s

portfolio of products covers a wide spectrum including soaps, detergents, skin creams,

shampoos, toothpastes, tea, coffee, packaged foods and branded atta.

Powerful brands and an envious distribution network (direct coverage of 3.2mn outlets) are

HUL’s primary strengths. The company operates through segments—soaps & detergents,

personal products, beverages, foods, exports, and other operations. Investment Theme

HUL is a play on consumption growth in India. The company has displayed its ability to effect

price hikes and ability to grow ahead of market, which, combined with improved outlook for

S&D and personal care, and strong growth in processed foods and beverages, boosts our

positive outlook on the company. We like its revenue growth from a medium to long term

perspective. Commodity price correction will aid gross margin expansion though we expect

partial benefit to be passed on to customers through promotional offers/select price cuts.

We expect higher investment in A&P to support brand equity and counter pick up in

competitive intensity (especially from regional players). However with an anticipated

recovery in urban demand and commodity correction to aid EBITDA margin expansion, we

expect HUL to potentially benefit.

Key Risks

Depreciation in rupee impacts price of imported raw materials.

Ad spends likely to spike due to increased competition from regional players. Maintaining

market share will also be a challenge for HUL.

The price war in HUL’s popular segments with new entrants entering the fray could hit the

company hard.


Hindustan Unilever

Financial Statements

Income statement (INR mn)

Year to March FY14 FY15 FY16E FY17E

Net revenue 285,394 311,997 342,192 386,549

Other Operating Income 6,943 7,725 8,497 9,347

Total operating income 292,337 319,722 350,689 395,896

Materials costs 148,700 161,761 170,276 192,570

Gross profit 143,637 157,961 180,413 203,327

Employee costs 15,727 17,239 18,587 20,191

Other Expenses 43,707 47,149 52,253 59,384

Advertisement & sales costs 36,747 39,436 44,888 49,487

EBITDA 47,457 54,137 64,685 74,264

Depreciation & Amortization 2,955 3,224 3,333 3,603

EBIT 44,501 50,913 61,352 70,661

Add: Other income 5,701 5,667 5,715 6,190

Less: Interest Expense 407 177 150 150

Add: Exceptional items 2,356 6,792 65 ‐

Profit Before Tax 49,796 56,403 66,916 76,701

Less: Provision for Tax 12,594 19,440 21,413 24,544

Less: Minority Interest 102 124 119 134

Reported Profit 39,456 43,631 45,449 52,023

Less: Exceptional Items (Net of 2,356 6,792 65 ‐

Adjusted Profit 37,100 36,839 45,384 52,023

No. of Shares outstanding (mn) 2,163 2,163 2,163 2,163

Adjusted Basic EPS 17.2 17.0 21.0 24.1

No. of Diluted shares outstanding 2,163 2,164 2,164 2,164

Adjusted Diluted EPS 17.2 17.0 21.0 24.0

Adjusted Cash EPS 18.5 18.5 22.5 25.7

Dividend per share (DPS) 13.0 15.0 15.8 18.0

Dividend Payout Ratio (%) 83.0 89.0 89.7 89.7

Common size metrics


Materials costs 52.1 51.8 49.8 49.8

Staff costs 5.5 5.5 5.4 5.2

Advertising & sales costs 12.9 12.6 13.1 12.8

Interest Expense 0.1 0.1 ‐ ‐

EBITDA margins 16.6 17.4 18.9 19.2

Net Profit margins 13.0 11.8 13.3 13.5

Growth ratios (%)


Revenues 8.4 9.3 9.7 13.0

EBITDA 12.8 14.1 19.5 14.8

Adjusted Profit 15.1 (0.7) 23.2 14.6

EPS 15.1 (0.8) 23.2 14.6

Key Assumptions


Macro

GDP(Y‐o‐Y %) 6.9 7.4 8.0 8.7

Inflation (Avg) 9.5 5.9 5.0 5.0

Repo rate (exit rate) 8.0 7.5 6.8 6.5

USD/INR (Avg) 60.5 61.1 64.5 65.0

Company

Volume gr. (overall) 4.0 5.0 7.0 8.0

Pricing gr. (overall) 4.4 4.3 2.7 5.0

Growth in Soaps 6.2 7.8 5.0 10.0

Growth in Detergents 7.6 9.7 8.0 13.0

Growth in PP 8.9 11.1 14.0 15.0

Growth in beverages 11.3 9.6 12.0 13.0

Growth in packaged foods 9.5 14.8 13.0 18.0

EBITDA margin (%) 16.6 17.4 18.9 19.2

EBITDA margin assumptions

Oils, fats and resins as % of COGS 11.5 11.9 11.2 11.2

Chemicals and perfumes as % of COGS 32.9 31.4 31.0 30.9

Tea and Green leaf as % of COGS 9.0 9.1 7.0 6.8

Selling and distribution costs 15.0 14.7 14.9 15.0

A&P as % of sales 12.9 12.6 13.1 12.8

Employee cost as % of sales 5.5 5.5 5.4 5.2

Financial assumptions

Tax rate (%) 25.3 34.5 32.0 32.0

Capex (INR mn) 5,800 3,329 1,987 4,500

Debtor days 13 12 12 12

Inventory days 69 65 65 65

Payable days 137 128 128 128

Cash conversion cycle (days) (55) (51) (52) (52)

Depreciation as % of gross block 6.3 6.2 6.0 6.0

Yield on cash 10.6 9.9 10.0 9.5


Consumer Goods

Peer comparison valuation

Market cap Diluted Price to Earnings Enterprise Value / EBITDA (X) Return on Average Equity

Name (USD mn) FY16E FY17E FY16E FY17E FY16E FY17E

Hindustan Unilever 27,039 38.0 33.2 25.7 22.3 106.2 108.6

Colgate 3,833 37.3 33.2 26.1 21.4 76.9 69.6

Dabur 7,318 37.1 30.9 29.9 24.8 34.7 34.6

Emami 3,816 55.5 41.1 30.6 23.5 32.0 35.4

GlaxoSmithKline Consumer Healthcare 3,911 35.2 29.7 25.3 20.6 31.4 31.6

Godrej Consumer 6,476 36.7 29.9 26.3 21.8 25.4 26.0

Marico 3,880 36.0 29.7 23.1 18.9 33.7 30.6

Nestle Ltd 9,118 85.7 45.3 39.7 24.5 23.2 37.5

AVERAGE ‐ 43.3 33.3 27.3 21.6 41.5 42.7

Source: Edelweiss research

Cash flow metrics


Operating cash flow 38,182 31,238 50,854 58,334

Investing cash flow (4,750) 3,061 (1,987) (4,500)

Financing cash flow (29,603) (34,624) (40,851) (46,812)

Net cash Flow 3,829 (325) 8,016 7,021

Capex (5,800) (3,329) (1,987) (4,500)

Dividend paid (32,730) (38,812) (40,766) (46,662)

Profitability and efficiency ratios


Return on Average Equity (ROAE) 115.4 97.2 106.2 108.6

Pre‐tax Return on Capital 154.1 147.1 154.9 158.6

Inventory Days 13 12 12 12

Debtors Days 69 65 65 65

Payable Days 137 128 128 128

Cash Conversion Cycle (55) (51) (52) (52)

Current Ratio 1.1 1.2 1.2 1.2

Gross Debt/EBITDA ‐ ‐ ‐ ‐

Net Debt/Equity (1.4) (1.3) (1.4) (1.3)

Interest Coverage Ratio 109.4 287.6 409.0 471.1

Operating ratios


Total Asset Turnover 6.6 6.4 6.5 6.6

Fixed Asset Turnover 11.0 11.2 11.9 13.0

Equity Turnover 8.9 8.2 8.0 8.1

Valuation parameters


Adjusted Diluted EPS (INR) 17.2 17.0 21.0 24.0

Y‐o‐Y growth (%) 15.1 (0.8) 23.2 14.6

Adjusted Cash EPS (INR) 18.5 18.5 22.5 25.7

Diluted Price to Earnings Ratio 46.5 46.8 38.0 33.2

Price to Book Ratio (P/B) (x) 48.7 42.9 38.4 34.3

Enterprise Value / Sales (x) 5.9 5.4 4.9 4.3

Enterprise Value / EBITDA (x) 35.3 30.9 25.7 22.3

Dividend Yield (%) 1.6 1.9 2.0 2.3

Balance sheet (INR mn)

As on 31st March FY14 FY15 FY16E FY17E

Share capital 2,163 2,164 2,164 2,164

Reserves & Surplus 33,210 38,053 42,736 48,097

Shareholders' funds 35,373 40,216 44,900 50,260

Minority Interest 223 248 367 501

Total Borrowings 456 430 430 430

Long Term Liabilities & Provisions 12,692 11,718 11,718 11,718

Deferred Tax Liability (net) (1,796) (1,994) (1,994) (1,994)

Sources of funds 46,948 50,619 55,421 60,915

Gross Block 49,977 53,306 57,806 62,306

Net Block 26,409 27,178 28,345 29,241

Capital work in progress 3,649 5,163 2,650 2,650

Intangible Assets 1,130 1,032 1,032 1,032

Total Fixed Assets 31,188 33,373 32,027 32,923

Non current investments 3,802 3,239 3,239 3,239

Cash and cash equivalents 49,740 53,907 61,923 68,944

Inventories 29,398 28,488 30,323 34,293

Sundry Debtors 10,168 10,112 11,049 12,473

Loans & Advances 10,513 12,340 12,340 12,340

Other Current Assets 934 851 851 851

Total Current Assets (ex cash) 51,013 51,791 54,564 59,958

Trade payable 58,249 55,073 59,713 67,531

Other Current Liabilities & Short 30,546 36,618 36,618 36,618

Total Current Liabilities & 88,795 91,692 96,332 104,150

Net Current Assets (ex cash) (37,782) (39,900) (41,768) (44,191)

Uses of funds 46,948 50,619 55,421 60,915

Book Value per share (INR) 16.4 18.6 20.7 23.2

Free cash flow (INR mn)


Reported Profit 39,456 43,631 45,449 52,023

Add: Depreciation 2,955 3,224 3,333 3,603

Interest (Net of Tax) 304 116 102 102

Others (6,823) (13,524) 102 182

Less: Changes in WC (2,290) 2,209 (1,868) (2,424)

Operating cash flow 38,182 31,238 50,854 58,334

Less: Capex 5,800 3,329 1,987 4,500

Free Cash Flow 32,382 27,909 48,867 53,834


Hindustan Unilever

Holding – Top10

Perc. Holding Perc. Holding

Life Insurance Corp Of India 1.1 Vanguard Group Inc 1.0

Aberdeen Asset Management Asia 0.9 Blackrock Fund Advisors 0.9

Virtus Investment Advisers Inc 0.7 Aberdeen Asset Management Plc 0.6

William Blair & Company Llc 0.5 Vontobel Asset Management Ag 0.4

Bajaj Allianz Life Insurance Co 0.3 Lyxor International Asset Mgmt 0.2

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Additional Data

Directors Data Mr. Harish Manwani Chairman Mr. Sanjiv Mehta Managing Director and Chief Executive Officer

Mr. Sridhar Ramamurthy Executive Director, Finance & IT and Chief Financial Officer Mr. Pradeep Banerjee Executive Director, Supply Chain

Mr. A. Narayan Independent Director Mr. S. Ramadorai Independent Director

Mr. R. A. Mashelkar Independent Director Mr. O. P. Bhatt Independent Director

Dr. Sanjiv Misra Independent Director

Auditors ‐ M/s. Lovelock & Lewes

*as per last annual report


Company Absolute

reco Relative

reco Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SO M Bajaj Corp HOLD SP H

Colgate HOLD SP M Dabur BUY SO M

Emami BUY SO H GlaxoSmithKline Consumer

Healthcare

HOLD SP M

Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L

ITC HOLD SU M Marico BUY SO M

Nestle Ltd REDUCE SU L Pidilite Industries BUY SO M

United Spirits BUY SO H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Hindustan Unilever

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91‐22) 4009 4400, Email: [email protected]

Nirav Sheth

Head Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Consumer Goods

Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 155 45 8 208* stocks under review

Market Cap (INR) 151 54 3

Date Company Title Price (INR) Recos

Recent Research

08‐Oct‐15 Bajaj Corp Resilient margin boosts show; Result Update

440 Hold

06‐Oct‐15 Consumer Goods

Margin succour; Result preview

01‐Oct‐15 Colgate Palmolive

MD meeting: Sharpening bite; Visit Note

962 Hold

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12‐month period

Hold appreciate up to 15% over a 12‐month period

Reduce depreciate more than 5% over a 12‐month period

Rating Expected to

One year price chart

573

693

813

932

1,052

1,172

Oct‐14

Nov‐14

Dec‐14

Jan‐15

Feb‐15

Mar‐15

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

Sep‐15

Oct‐15

(INR)

Hindustan Unilever


Consumer Goods

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Hindustan Unilever

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Consumer Goods

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