Hindustan Unilever. Institutional Equities. 3QFY18 Result Update BUY

Transcription

1 3QFY18 Result Update Institutional Equities Hindustan Unilever 18 January 2018 Reuters: HLL.BO; Bloomberg: HUVR IN Robust Performance Maintained Hindustan Unilever or HUL reported a robust set of numbers for 3QFY18, in terms of top-line as well as bottom-line. Revenues of Rs85,900mn were largely in line with our expectation, but slightly above consensus. Comparable sales growth stood at 17%, driven by robust volume growth of 11%. EBITDA for the quarter stood at Rs16,800mn, in line with consensus estimate but slightly below our expectation. Operating margin delivery was also fairly good despite making huge investments on brands and market development. As regards net Income, there was significant outperformance compared to our as well as street expectations mainly because of the rise in other income (dividend from its subsidiary). Volume led top-line growth: Broad-based growth across categories, improved consumer off-take and rural growth rates helped the company to report robust underlying volume growth of 11%. All the categories grew in mid-high teens on a comparable basis. Growth was witnessed across the entire portfolio and across all channels. Modern trade and e-commerce channels are growing very rapidly and HUL s disproportionate share in those channels resulted in achieving better growth in its mid-premium brands. The premiumisation theme is clearly being played out, but HUL also managed to grow its mass and mid segment brands while delivering strong growth in top-line. During the quarter, the company launched a shampoo under the Indulekha brand nationwide to further strengthen its presence in naturals category. Also, Pureit has entered the air purifier segment currently in North India. With a focus on core brands, spending on promotion and market development, foray into Naturals, rising presence in categories of the future and sustainable pick-up in rural demand likely in the coming quarters, we expect HUL to grow well ahead of the overall market. Healthy operating margin: Margin delivery has been fairly good, despite the uptick in media spending as a result of national rollout of Lever Ayush, promotion of other brands and market development activities. Gross margin witnessed a 310bps improvement YoY led by better revenue mix. Both home care and personal care categories reported healthy operating margin led by premiumisation. EBITDA margin for the quarter was 19.6% with a 110bps improvement YoY on comparable basis. Although the operating margin for the quarter was below our expectation, we believe that with strong growth of the core portfolio and focus on cost rationalisation via techniques like ZBB, margin profile will continue to look better in the coming quarters. However, this will be partially offset by an inflationary environment as far as input costs are concerned. Valuation and outlook: We expect HUL to deliver competitive top-line and profitability growth and any further higher rural offtake in 2018 could support this growth impetus. We have retained our Buy rating on HUL with an above consensus earnings estimate and a revised target price of Rs1,700 (from Rs1,570 earlier) after rolling forward our investment horizon to March 2019, implying an upside of 24% from the CMP based on an earnings multiple of 50x. BUY Sector: FMCG CMP: Rs1,371 Target Price: Rs1,700 Upside: 24% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com Key Data Current Shares O/S (mn) 2,164.5 Mkt Cap (Rsbn/US$bn) 2,967.9/ Wk H / L (Rs) 1,391/827 Daily Vol. (3M NSE Avg.) 1,052,061 Price Performance (%) 1 M 6 M 1 Yr Hindustan Unilever Nifty Index Source: Bloomberg Y/E March (Rsmn) 3QFY17 2QFY18 3QFY18 YoY (%) QoQ (%) 9MFY17 9MFY18 YoY (%) Net sales 77,060 83,090 85, ,36,769 2,54, COGS 37,446 39,290 39, (0.6) 1,16,622 1,19, % of sales (310bps) (180bps) (240bps) Gross margin % bps 180bps bps Employee costs 4,093 4,350 4, ,318 13, % of sales bps 50bps bps Advertising costs 8,851 10,230 11, ,163 30, % of sales bps 60bps bps Other expenses 13,115 12,400 14, ,707 39, % of sales (60bps) 150bps (60bps) EBITDA 13,554 16,820 16, (0.1) 43,960 52, EBITDA margin % bps (70bps) bps Depreciation 1,002 1,150 1, ,880 3, EBIT 12,552 15,670 15, (0.5) 41,080 48, EBIT margin % bps (70bps) bps Interest expenses (16.7) Other income 824 2,040 1, (25.5) 4,429 4, Exceptional items 1, (210) (113.7) (158.3) 2, (99.2) PBT 14,862 18,010 16, (6.4) 47,774 53, Tax 4,482 5,250 3,590 (19.9) (31.6) 14,700 14,470 (1.6) Effective tax rate % (890bps) (780bps) (360bps) PAT 10,379 12,760 13, ,074 38, PAT margin % bps 20bps bps EPS

2 Exhibit 1: Financial summary Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net sales 3,10,610 3,18,899 3,41,329 3,69,762 4,05,582 YoY growth (%) EBITDA 57,491 60,470 71,431 86,209 1,00,462 EBITDA margin (%) PAT 41,365 44,904 51,955 62,707 73,274 EPS YoY change (%) (4.6) RoCE (%) RoE (%) P/E (x) P/B (x) EV/EBITDA (x) Exhibit 2: Category-wise performance Segment results 3QFY17 2QFY18 3QFY18 YoY (%) QoQ (%) 9MFY17 9MFY18 YoY (%) Segment revenues (Rsmn) 83,073 83,030 85, ,55,658 2,61, Home care 26,891 27,390 27, ,420 85, Personal care 39,802 39,100 40, ,22,297 1,23, Food 2,785 2,820 3, ,286 8, Refreshment 11,641 12,220 12, ,482 38, Others 1,954 1,500 2, ,173 5,290 (14.3) Sales proportion (%) - Home care (0.5) (1.1) Personal care (0.3) (0.5) - Food Refreshment (0.2) Others (0.4) Segment results (Rsmn) 13,360 15,560 15, (1.7) 43,108 49, Home care 2,340 3,830 3, (7.6) 8,699 11, Personal care 9,210 9,480 10, ,649 30, Food (57.7) (35.3) Refreshment 1,710 2,140 1,690 (1.2) (21.0) 5,357 6, Others (160) (60) (110) (31.3) 83.3 (163) (230) 40.8 EBIT margin (%) - Home care (1.1) Personal care Food (5.7) (2.4) Refreshment (1.1) (4.0) Others (8.2) (4.0) (5.2) 3.0 (1.2) (2.6) (4.3) (1.7) EBIT composition (%) - Home care (1.5) Personal care (3.1) (4.6) - Food (1.2) (0.4) Refreshment (1.8) (2.7) Others (1.2) (0.4) (0.7) 0.5 (0.3) (0.4) (0.5) (0.1) Note: The above numbers are reported numbers. Following the change in accounting treatment, these numbers are not comparable as the base quarter numbers have not been restated; Exhibit 3: Comparable sales growth category-wise Segments Comparable sales growth (%) Home care 20 Personal care 17 Refreshment 13 Food 18 Total 17 2 Hindustan Unilever

3 Exhibit 4: Our estimates versus actual performance Y/E (Rsmn) 3QFY17 2QFY18 3QFY18 YoY (%) QoQ (%) NBIE estimate Variation (%) Net sales 77,070 83,090 85, , EBITDA 13,554 16,820 16, (0.1) 17,396 (3.4) EBITDA (%) bps (70bps) 20.5 (90bps) PAT 10,379 12,760 13, , Exhibit 5: Change in our estimates Y/E March Old estimate New estimate Change (%) (Rsmn) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Net sales 3,40,289 3,68,611 4,04,848 3,41,329 3,69,762 4,05, EBITDA 72,451 85,946 1,00,287 71,431 86,209 1,00,462 (1.4) EBITDA (%) (40bps) - - PAT 52,576 62,505 73,139 51,955 62,707 73,274 (1.2) Conference-call highlights The management stated that the robust growth in top-line was broad-based across categories and across channels. Rural growth rates were higher than urban growth rates mainlybecause of the early signs of recovery and a favourable base as rural areaswere impacted the most in the base quarter. All the categories reported strong growth rates on a comparable basis. Home care grew 20% YoY on a comparable basis driven by double-digit volume growth. All the sub-categories (mass to premium) showcased healthy growth rate. Similarly premiumisation trend was clearly reflected from the home care margin (EBIT margin) of 12.9% which witnessed almost a 400bps expansion YoY. Surf and Vim brands continued to do well. Personal care segment witnessed some upswing after a couple of relatively weak quarters. Personal wash category continued to do well led by Dove. Also, brands which were showing some signs of weakness in the past like Fair and Lovely, Pears etc grew well. Brand initiatives and relaunches really paid off for the company. Other categories of personal care also reported good numbers, thereby leading to 17% growth in the category as a whole on a comparitive basis. On the margin side, again there was improvement of around 150bps YoY. Food business reported a robust growth 18% while refreshment category grew 13% on a relatively higher base. Food business (forms just 3% of the top-line) saw some margin dilution because of the competitive environment. Similarly, refreshment category reported 13.5% margin (EBIT margin) which was slighly onthe lower side compared to the same quarter last year. Hence, the margin was largely driven by home care and personal care segments which togetheraccount for around 80% of the revenues. The management stated that GST council announced a rate cut on 15 November 2017 wherein majority of the goods taxed at 28% were brought down to 18% bucket The implementation was done immediately. Following paucity of time, the entire benefits could not be passed on to consumers in case of some pipeline stock. Therefore, the estimated value of Rs1.19bn has been netted off against sales and the company created the liability of that amount in its books suo moto. This shows the proactivenes and transparency of operations and assures confidence among investors. The company has either reduced the MRP or increased grammage of almost 800 SKUs. This execise has been done across categories and the average reduction arrived at was 7%-9% in pricing. HUL has taken relatively higher price cuts (close to 20%) in some premium brands which will help in increasing the offtake in a big way for those brands, in our opinion. The management sounded positive about the consumer response for Lever Ayush and Indulekha. Although, their proportion to overall revenues is miniscule as on date, naturals is a very big business opportunity and HUL is on right track while strengthening its presence. Lever Ayush has been widely marketed by the company. Growth of Indulekha brand is better than internal expectation. Also, under Indulekha, the company has introduced a shampoo to strenghthen its naturals portfolio in hair care. Advertising and promotion or A&P spending was on the higher side during the quarter which has impacted operating margin to some extent. The management indicated that the company is spending on existing brands as well as new launches. However, a lot of investment is also being made in data and analytics, the fruits of which will be seen in the coming quarters whereby the companywill,be able to tap target customers forits preferred brands across geographies. Also, there is a lot of focus on market development activities like spending on categories of future and overall increase in consumer awareness. It was stated that with crude oil prices on the higher side, total costs are likely to move upwards in the coming quarters. Cost areas which get affected by the sharp movement in crude oil prices are mainly raw materials 3 Hindustan Unilever

4 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Institutional Equities Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 (chemicals), packaging costs and logistics. The management indicated that the price hike is the last resort for the company in case of a steep hike in the costs because of commodity prices. The management stated that growth in rural business is showing early signs of recovery and a few more quarters with rural growth outperforming urban growth could help us establish th clear pattern of rural revival. However, it was clearly stated that overall consumer sentiment is improving gradually. On trade channels, the management stated that growth was witnessed across channels. Growth in modern trade and e-commerce continued. On the distribution side, the management informed that higher share of direct reach has helped the company deliver well even in turbulent times. Exhibit 6: Robust volume growth (%) (%) (2) (4) (1.0) (4.0) (6) Exhibit 8: Modest operating profit growth (Rsmn) (%) 20, , , ,000 16, , ,000 (5.2) 5 13,000 12, ,000 (5) 10,000 (10) EBITDA (Rs mn) EBITDA growth % Exhibit 10: Improved margin profile (%) 21.9 (%) EBITDA margin % PAT margin % (RHS) Exhibit 7: Improved top-line performance (Rsmn) (%) 88, , , , , ,000 (1.0) 4 76, , ,000 (2) Net Sales (Rs mn) Sales growth (%) Exhibit 9: Huge uptick in net income (Rsmn) 27.8 (%) 13,500 13, , , , , , ,000 6 PAT (Rs mn) PAT Growth % Exhibit 11: One-year forward P/E (x) PE Median +1 SD -1 SD 4 Hindustan Unilever

5 Financials (standalone) Exhibit 12: Income statement Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Net sales 3,10,610 3,18,899 3,41,329 3,69,762 4,05,582 % Growth COGS 1,53,053 1,56,842 1,59,832 1,71,107 1,83,818 Staff costs 15,728 16,198 17,628 18,118 19,468 Advertising costs 36,000 34,693 39,490 38,375 43,096 Other expenses 48,338 50,697 52,948 55,952 58,738 Total expenses 2,53,118 2,58,429 2,69,898 2,83,553 3,05,120 EBITDA 57,491 60,470 71,431 86,209 1,00,462 % growth EBITDA margin (%) Other income 5,638 5,259 5,822 5,996 6,576 Interest costs Depreciation 3,208 3,960 4,943 5,112 5,269 Profit before tax (before - xceptional items) 59,769 61,554 72,139 87,093 1,01,769 Exceptional items (308) 2, Tax 18,096 19,060 20,205 24,386 28,495 PAT (before exceptional items) 41,673 42,494 51,935 62,707 73,274 PAT 41,365 44,904 51,955 62,707 73,274 PAT margin (%) % Growth (4.6) Exhibit 14: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E Share capital 2,164 2,164 2,164 2,164 2,164 Reserves 60,630 62,740 65,026 67,785 66,631 Net worth 62,794 64,904 67,190 69,949 68,795 Total debt Deferred tax liability (1,680) (1,600) (1,600) (1,600) (1,600) Total liabilities 71,004 73,894 74,473 77,971 77,721 Gross block 31,950 43,190 46,690 50,690 54,690 Depreciation 2,930 6,650 11,593 16,706 21,975 Net block 29,020 36,540 35,097 33,984 32,715 Capital work-in-progress 3,980 5,730 7,500 7,500 7,000 Investments 3,190 2,600 7,106 7,698 8,421 Inventories 25,280 23,620 23,673 26,019 25,350 Debtors 10,640 9,280 8,242 10,739 10,025 Cash 30,120 19,770 23,166 29,150 25,252 Loans & advances 2,940 3,120 3,198 3,464 3,789 Other current assets 4,870 6,250 5,330 5,773 8,421 Total current assets 95,524 94,114 90,613 1,04,396 1,06,940 Creditors 54,980 60,060 58,828 63,057 67,882 Other current liabilities & provisions 11,540 11,960 14,213 20,015 17,262 Total current liabilities 66,520 72,020 73,041 83,071 85,145 Net current assets 29,004 22,094 17,572 21,325 21,796 Total assets 71,004 73,894 74,473 77,971 77,721 Exhibit 13: Cash flow Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY20E PAT 41,365 44,904 51,955 62,707 73,274 Depreciation 3,208 3,960 4,943 5,112 5,269 Other income (5,638) (5,259) (5,822) (5,996) (6,576) (Inc.)/dec. in working capital (786) 7,140 2,926 4, Cash flow from operations 43,787 56,004 59,823 72,565 79,352 Capital expenditure (-) (6,622) (13,230) (5,270) (4,000) (3,500) Net cash after capex 37,165 42,774 54,553 68,565 75,852 Interest paid (-) Dividends paid (-) (41,395) (42,929) (49,669) (59,948) (74,428) Inc./(dec.) in total borrowings Inc./(dec.) in investments 2,476 (9,990) 486 (3,106) (5,900) Cash from financial activities (39,315) (42,149) (51,375) (59,209) (73,524) Others - 1, Opening cash balance 28,610 30,120 19,770 23,166 29,150 Closing cash balance 30,120 19,770 23,166 29,150 25,252 Exhibit 15: Key ratios Y/E March FY16 FY17 FY18E FY19E FY20E Per share (Rs) EPS Book value DPS Valuation (x) P/Sales EV/sales EV/EBITDA P/E P/BV Return ratios (%) RoCE RoE Profitability ratios (%) Gross margin EBITDA margin EBIT margin PAT margin Liquidity ratios (%) Current ratio Quick ratio Solvency ratio (%) Debt to Equity ratio Turnover ratios Total asset turnover ratio (x) Fixed asset turnover ratio (x) Debtor days Inventory days Creditor days Hindustan Unilever

6 Apr-17 Apr-17 May-17 May-17 May-17 Jun-17 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Sep-17 Oct-17 Oct-17 Oct-17 Nov-17 Nov-17 Dec-17 Dec-17 Jan-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 29 September 2017 Buy 1,170 1, October 2017 Buy 1,272 1, December 2017 Buy 1,350 1, January 2018 Buy 1,371 1,700 Rating chart Not Covered Covered 6 Hindustan Unilever

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Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Hindustan Unilever