BUY. GST pressures dealt well HINDUSTAN UNILEVER. Target Price: Rs 1,400. Key drivers (%) FY16 FY17 FY18E FY19E

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1 GST pressures dealt well Q2 tops estimates: Net sales, EBITDA and adj. PAT grew 7%, 20% and 19%, vs. consensus expectation of 7%, 14% and 11%. Like to like^ (LTL) domestic consumer revenue grew ~10% on ~4% volume growth. Benign input costs and benefits from cost saving initiatives absorbed effect of step-up in A&P spends (+20% YoY), leading to EBITDA growth at 19% (LTL OPM up 180 bps YoY). Company highlighted while GSTrelated transition affected trade purchases, consumer off-take was stable during the quarter. HUL is the best play on two structural trends -- premiumization and shift to organized due to GST. We expect OPM to increase by bps over FY17-20E on multiple margin tailwinds. Maintain BUY with revised TP of Rs 1,400 based on forward P/E of 44x. We justify a higher than usual target P/E given the 19% EPS CAGR over FY17-19E. 31 OCT 2017 Quarterly Update BUY Target Price: Rs 1,400 CMP : Rs 1,274 Potential Upside : 10% MARKET DATA No. of Shares : 2,164 mn Free Float : 33% Market Cap : Rs 2,757 bn 52-week High / Low : Rs 1,287 / Rs 783 Avg. Daily vol. (6mth) : 1.4 mn shares Bloomberg Code : HUVR IB Equity Promoters Holding : 67% FII / DII : 13% / 6% Q2FY18 segment performance (LTL): Home care revenue grew strong 13% aided by robust volume growth. Company highlighted laundry segment posted double digit growth across portfolio. Personal care revenue grew 8% with broad based growth across personal products and personal wash (Dove, Lux and Lifebuoy grew in double digits). On Ayurvedic platform, the company highlighted Indulekha sustained strong momentum (now clinically proven for hair growth) and Lever Ayush got off to a good start after national launch in Q1. Oral care remained an area of concern, where performance remained subdued. GST-led price reduction for existing portfolio and Lever Ayush launch nationally should help in coming quarters. Refreshment and Food revenue grew 10% and 11% YoY. Management view -- Rural to see recovery, RM cost inflation a concern: In near term, company expects gradual improvement in rural demand (driven from good monsoon in water-starved areas, recent minimum support price increase for wheat and government investment plan) and improvement in trade conditions. Raw material prices are likely to inflate further (inflationary crude is an area of concern). Financial summary (Standalone) Sales (Rs mn) 304, , , ,077 Adj PAT (Rs mn) 41,680 42,490 51,198 60,182 Con. EPS* (Rs) EPS (Rs) Change YOY (%) P/E (x) RoE (%) RoCE (%) EV/E (x) DPS (Rs) Source: *Consensus broker estimates, Company, Axis Capital ^ Adjusted for accounting impact of GST Key drivers (%) FY16 FY17 FY18E FY19E Volume growth 5.8% 0.8% 6.0% 8.0% Net Sales growth 4.2% -0.4% 9.3% 11.9% RM cost to sales 50.2% 50.1% 49.0% 49.0% EBITDA margin 18.8% 19.3% 21.4% 22.2% Price performance 200 Sensex Hindustan Unilever Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 01

2 31 OCT 2017 Quarterly Update Our view As highlighted in our upgrade note Multiple margin tailwinds, we view the margin to benefit from factors like (i) pricing power, (ii) easing in competitive pressure from P&G (price hikes in shampoo and detergents started refer Consumer monthly Oct), (iii) likely GST benefits (shift from unorganized to organized), (iv) premiumization and (v) cost rationalization initiatives. Volume growth should see uptick in H2FY18E. Conference call highlights Price growth in Q2 stood at ~6%. GST-related pass through was 3-4% at an organizational level. On rate reduction Personal care portfolio saw price cuts. The company has reduced prices for body lotion, despite GST rate increase, to drive growth A&P increased 20% YoY to support innovation mainly Lever Ayush launched nationally. Share of television advertisement has come down to ~70% (from 90% few years back). Incremental share is now allocated to digital and mobile Indulekha -- Existing market growth is satisfactory. Penetration is extremely low even in market it was present. Company is looking to drive advertisement through substantial clinically-proven claims Channel contribution -- Online is now 2% of turnover. Modern trade and CSD contribute ~12% and ~7% CSD channel is back to ~85-90% of normal buying pattern Exceptional income includes profit on sale of share of Kimberly-Clark Lever Pvt. Ltd. Worth Rs 460 mn Results update Quarter ended (Rs mn) Sep-17 Sep-16 % Chg Jun-17 % Chg Net sales 81,990 76, ,010 (2.4) Other operating income 1,100 1,450 (24.1) 1,280 (14.1) Total revenue 83,090 78, ,290 (2.6) Raw material cost 39,290 39,620 (0.8) 40,840 (3.8) (% of net sales) bps bps Staff expenditure 4,350 3, , (% of net sales) bps bps A&P spends 10,230 8, , (% of net sales) bps bps Other expenses 12,400 12, ,550 (1.2) (% of net sales) bps bps EBITDA 16,820 14, ,660 (9.9) EBITDA margin (%) bps bps Other income 2,040 2,530 (19.4) 1, PBIDT 18,860 16, ,790 (4.7) Depreciation 1, , Interest PBT 17,650 15, ,590 (5.1) Tax 4,730 4,762 (0.7) 5,670 (16.6) Adjusted PAT 12,920 10, , Extra ordinary income/ (exp.) (160) 135 (218.3) (90) 77.8 Reported PAT 12,760 10, ,830 (0.5) 02

3 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 31 OCT 2017 Quarterly Update Segmental financials (Rs mn) Gross sales PBIT PBIT margin (%) Q2FY18 Q2FY17 YoY (%) Q2FY18 Q2FY17 YoY (%) Q2FY18 Q2FY17 YoY (bps) Home care 27,390 27,770 (1.4) 3,830 2, Personal care 39,100 40,280 (2.9) 9,480 9, Foods 2,820 2, Refreshment 12,220 11, ,140 1, Others 1,500 2,180 (31.2) (60) 90 (166.7) (4.0) 4.1 (813) Total segment 83,030 84,700 (2.0) 15,560 13, Net sales growth Volume growth (%) (%) (2) (1) (3) (1.2) (6) (4) Valuations 1-year forward P/E trend 50 P/E 10 yr median Source: Bloomberg, Axis Capital 03

4 Financial summary (Standalone) Profit & loss (Rs mn) Net sales 304, , , ,077 Other operating income 5,620 5,920 6,378 6,871 Total operating income 310, , , ,949 Cost of goods sold (153,050) (156,850) (167,304) (187,835) Gross profit 157, , , ,114 Gross margin (%) Total operating expenses (100,070) (101,580) (108,230) (117,165) EBITDA 57,490 60,470 73,073 84,949 EBITDA margin (%) Depreciation (3,210) (3,960) (4,170) (4,471) EBIT 54,280 56,510 68,904 80,478 Net interest (150) (220) (150) (125) Other income 5,640 5,260 4,913 5,621 Profit before tax 59,770 61,550 73,667 85,974 Total taxation (18,090) (19,060) (22,468) (25,792) Tax rate (%) Profit after tax 41,680 42,490 51,198 60,182 Minorities Profit/ Loss associate co(s) Adjusted net profit 41,680 42,490 51,198 60,182 Adj. PAT margin (%) Net non-recurring items (310) 2, Reported net profit 41,370 44,900 51,198 60,182 Balance sheet (Rs mn) Paid-up capital 2,160 2,160 2,161 2,161 Reserves & surplus 60,630 62,740 67,778 74,042 Net worth 62,790 64,900 69,939 76,204 Borrowing Other non-current liabilities (1,680) (1,600) (1,600) (1,600) Total liabilities 61,110 63,300 68,339 74,604 Gross fixed assets 32,180 47,120 52,120 57,320 Less: Depreciation (3,040) (6,880) (11,050) (15,521) Net fixed assets 29,140 40,240 41,070 41,799 Add: Capital WIP 3,860 2,030 2,030 2,030 Total fixed assets 33,000 42,270 43,100 43,829 Total Investment 27,800 37,790 40,790 43,790 Inventory 25,280 23,620 25,784 29,387 Debtors 10,640 9,280 10,314 11,545 Cash & bank 27,590 16,710 22,904 28,351 Loans & advances 5,470 6,180 6,631 7,430 Current liabilities 76,410 82,610 87,435 96,229 Net current assets 310 (16,760) (15,552) (13,016) Other non-current assets Total assets 61,110 63,300 68,339 74,604 Cash flow (Rs mn) 31 OCT 2017 Quarterly Update Profit before tax 59,770 61,550 73,667 85,974 Depreciation & Amortisation 3,210 3,960 4,170 4,471 Chg in working capital (1,130) 6,660 4,986 2,911 Cash flow from operations 39,740 49,530 55,441 61,943 Capital expenditure (7,570) (13,670) (5,000) (5,200) Cash flow from investing (720) (7,520) (3,087) (2,579) Equity raised/ (repaid) Debt raised/ (repaid) Dividend paid (39,970) (42,540) (46,440) (54,198) Cash flow from financing (40,080) (42,640) (46,160) (53,917) Net chg in cash (1,060) (630) 6,195 5,447 Key ratios OPERATIONAL FDEPS (Rs) CEPS (Rs) DPS (Rs) Dividend payout ratio (%) GROWTH Net sales (%) EBITDA (%) Adj net profit (%) FDEPS (%) PERFORMANCE RoE (%) RoCE (%) EFFICIENCY Asset turnover (x) Sales/ total assets (x) Working capital/ sales (x) (0.1) (0.1) (0.1) (0.1) Receivable days Inventory days Payable days FINANCIAL STABILITY Total debt/ equity (x) Net debt/ equity (x) (0.8) (0.8) (0.9) (1.0) Current ratio (x) Interest cover (x) VALUATION PE (x) EV/ EBITDA (x) EV/ Net sales (x) PB (x) Dividend yield (%) Free cash flow yield (%)

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