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Hindustan Unilever Limited (HUL) is India's largest Fast
Moving Consumer Goods company with a heritage of over 80 years in India. On any
given day, nine out of ten Indian households use our products to feel good,
look good and get more out of life – giving us a unique opportunity to build a
brighter future.With over 35 brands spanning 20 distinct categories such as
soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics,
tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a
part of the everyday life of millions of consumers across India. Its portfolio
includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin,
Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk,
Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and
works to create a better future every day and helps people feel good, look good
and get more out of life with brands and services that are good for them and
good for others.
The Company has about 18,000 employees and has a net sales of INR 33895
crores (financial year 2016-17). HUL is a subsidiary of Unilever, one of the
world’s leading suppliers of Food, Home Care, Personal Care and Refreshment
products with sales in over 190 countries and an annual sales turnover of €52.7
billion in 2016. Unilever has over 67% shareholding in HUL.
Strong improvement in
* Strong quarter on profitability: Revenue grew by 4.9% yoy to Rs85.3bn,
led by price hikes; EBITDA grew by 14.1% yoy to Rs18.7bn while APAT grew by
14.9% yoy to Rs12.9bn.
* Volume growth was flat, impacted by thinning of trade pipeline (CSD
channel worst hit). If CSD channel was normal, volume growth would have been 2%
yoy. Expect sales to normalize in the next few months. Rural growth revival is
expected to be gradual.
* Gross margin expanded by 80bps to 52.1%, led by premiumisation and
price increases. EBITDA margin came in strong at 21.9%, up 180bps yoy (similar
to pre-2004 level). EBITDA margin was aided by lower other expenditure and
reduced ad spends.
* We believe HUL is moving into a phase of strong earnings growth,
driven by expansion in margins. We upgrade our earnings estimates by 0.5%/2%
for FY18E/FY19E and estimate 18.9% CAGR in EPS for FY17-19E. We believe strong
earnings would re-rate the stock and maintain ACCUMULATE rating. We assign a
P/E of 45x and arrive at a target price of Rs1,250.
Revenue growth steady while
margin performance strong
HUL’s Q1FY18 result was ahead of our expectations on profitability
front. Key highlights were: 1) Revenue at Rs85.3bn grew by 4.9% yoy with
underlying volume growth flat. Domestic business witnessed a healthy growth of
6% yoy, 2) EBITDA at Rs18.7bn grew by 14.1% yoy, while gross margin was healthy
at 52.1% (+80bps), aided by better mix and price. EBITDA margin increased by 180bps
yoy to 21.9% on the back of prudent cost management across every line item of
P&L and 3) APAT grew by 14.9% yoy to Rs12.9bn.
Volumes marred by CSD,
expect things to normalize in H2FY18
Volume got impacted, as trade pipeline in Personal Care and Foods
segments contracted due to destocking ahead of GST rollout, with CSD channel
being the worst hit. Had CSD channel sales been normal, volume growth would
have been 2% yoy. Even in the first half of July, the CSD channel continued to
be affected, the same is likely to normalise in few weeks. The company expects
overall channel to normalize in the next few months. Rural growth was in line
with urban growth, and uptick in rural growth is expected to be gradual. After
successful launch of Lever Ayush brand in South India, the company will now
roll it out nationally.
Outlook and valuation:
We believe that HUL is gradually moving into a phase of
strong earnings growth, driven by margin expansion. We have revised our
estimates to factor in lower revenue growth, as the company passed on the
benefit of GST and increased our margin estimates to factor in a 300bps
improvement in margin during FY17-19E. We have our earnings estimates by
0.5%/2% for FY18E/FY19E. We maintain our ACCUMULATE rating with a price target of Rs1,250.