Hindustan Unilever. Institutional Equities. 1QFY19 Result Update

Transcription

1 1QFY19 Result Update Institutional Equities Hindustan Unilever 17 July 218 Reuters: HLL.BO; Bloomberg: HUVR IN Breakout Growth Hindustan Unilever (HUVR) has delivered strong volume led top-line growth in 1QFY19, registering the third consecutive quarter of double-digit volume growth. The growth was broadbased as all categories grew in double digits. The operating performance was superior and margins surprised our and consensus estimates. Operating profit and net earnings grew 21% and 19% YoY, respectively. We believe that HUVR can maintain its high tempo of growth supported by improved demand, higher velocity of investments in existing as well as new categories and strong competitive footing of its brands. What differentiates HUVR from its peers is that the company is making investments in various categories which are at a nascent stage and that gives the company an early-mover advantage to leverage its potential. We continue to believe that HUVR is key beneficiary of the premiumisation trend and the same is evident from its strong margin delivery. Margin expansion in home care is a function of premiumisation and market share gains. Also, HUVR will continue to reap the benefits of investment being made in the personal care space. Naturals portfolio is tracking expectations and set to grow 2.5x company average. In our opinion, improved growth trajectory and competitive strength of its iconic brands will help HUVR in maintaining above average growth going forward. Therefore, after revising our estimates (upward revision of EPS by 3% and 6% for FY19 and FY2 respectively leading to EPS expectations ahead of consensus by 4% and 1%) and earnings multiple to 55x, we have retained Buy rating on HUVR with a revised target price of Rs2,25 (from Rs1,75 earlier) based on FY2E EPS, indicating an upside of 16% from the CMP. Strong underlying trends: HUVR delivered strong volume-led growth of 16% in 1QFY19 on a comparable basis. Volume growth of 12% was broad-based, similar to the preceding quarter, as all categories grew in double digits. Its premium portfolio continued the strong growth momentum led by Surf, Dove, Tea brands, Indu Lekha etc. During the quarter, there were new launches in the home care (Domex liquid and powder) and personal care (Lakme 9 to 5 Naturale make-up range) segments. Healthy operating margin: The company surprised our as well as consensus expectations on the operating margin front, despite very high media spends. HUVR delivered more than 2% growth in operating earnings for the past four consecutive quarters. All categories witnessed margin improvement, but home care has been leading from the front, clocking 19.1% EBIT margin in 1QFY19. This clearly reflects market share gains in the premium segment across categories. Also, cost rationalisation measures like Zero Based Budgeting (ZBB) further aided in strong margin delivery. Outlook and valuation: In our opinion, improved growth trajectory and the strength of iconic brands will help HUVR to attain above average growth going forward. Accordingly, we have revised our estimates wherein EPS has witnessed an upward revision of 3% and 6% for FY19 and FY2 respectively which is 4% and 1% above the consensus estimates. Therefore, we have retained Buy rating on HUVR with a revised target price of Rs2,25 (from Rs1,75 earlier) based on FY2E EPS, indicating an upside of 16% from the CMP after upward revision of the earnings multiple to 55x. NBIE Values your patronage- Vote for The Team in the Asia Money poll 218. Click Here BUY Sector: FMCG CMP: Rs1,751 Target Price: Rs2,25 Upside: 16% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com Key Data Current Shares O/S (mn) 2,164.6 Mkt Cap (Rsbn/US$bn) 3,79.8/ Wk H / L (Rs) 1,779/1,13 Daily Vol. (3M NSE Avg.) 1,252,986 Price Performance (%) 1 M 6 M 1 Yr Hindustan Unilever Nifty Index Source: Bloomberg Y/E March (Rsmn) 1QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) FY17 FY18 YoY (%) Net sales 85,29 9,97 94, ,18,899 3,45, COGS 4,84 43,14 43, ,56,842 1,62, Gross margin % bps 14bps bps Employee costs 4,19 4, 4, ,198 17, % of sales (3bps) 3bps Advertising costs 9,5 1,7 11, ,693 41, % of sales bps 4bps bps Other expenses 12,55 12,65 12, ,697 51, % of sales (13bps) (4bps) (9bps) EBITDA 18,66 2,48 22, ,47 72, EBITDA margin % bps 12bps bps Depreciation 1,14 1,28 1, (.8) 3,96 4, EBIT 17,52 19,2 21, ,51 67, EBIT margin % bps 13bps bps Other income 1,13 1, 1, ,259 5, Exceptional items (13) (64) (59) (7.8) 2,411 (62) (125.7) PBT 18,46 19,52 21, ,964 72, Tax 5,63 6,1 6, ,6 2, Effective tax rate % (2bps) (5bps) 3 28 (17bps) PAT 12,83 13,51 15, ,94 52, Adjusted PAT 12,96 14,15 15, ,494 52, Adj. PAT margin % bps 11bps bps EPS (Rs)

2 Exhibit 1: Financial summary Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E Net sales 3,1,61 3,18,899 3,45,25 3,91,74 4,45,84 YoY growth (%) EBITDA 57,491 6,47 72,76 89,719 1,9,853 EBITDA margin (%) PAT 41,365 44,94 52,36 63,543 79,77 EPS YoY change (%) (4.6) RoCE (%) RoE (%) P/E (x) P/BV (x) EV/EBITDA (x) Exhibit 2: Our estimates versus actual performance Y/E (Rsmn) 1QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) NBIE estimate Variation (%) Net sales 85,29 9,97 94, ,561 (.7) EBITDA 18,66 2,48 22, , EBITDA (%) bps 12bps bps Adj PAT 12,96 14,15 15, ,873 - Exhibit 3: Change in our estimates Y/E March Old estimates New estimates Change (%) (Rsmn) FY19E FY2E FY19E FY2E FY19E FY2E Net sales 3,83,973 4,29,676 3,91,74 4,45, EBITDA 86,874 1,4,219 89,719 1,9, EBITDA margin (%) bps 3bps Net income 61,869 75,391 63,543 79, Hindustan Unilever

3 Exhibit 4: Category-wise performance Segment-wise results 1QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) FY17 FY18 YoY (%) Segment-wise revenues (Rsmn) 92,13 9,97 94, ,44,48 3,52, Home care 3,47 31,2 31, ,13,46 1,16, Beauty & Personal care 43,68 4,96 44, ,63,47 1,64, Foods & refreshments 16,3 17,8 17, ,718 63,9 7. Others 1,68 1,91 1,49 (11.3) (22.) 8,183 7,2 (12.) Sales proportion (%) - Home care (.9) Beauty &Personal care (1.) (.6) - Foods & refreshments Others (.3) (.5) (.3) Segment-wise results (Rsmn) 18,17 18,64 2, ,268 67, Home care 4,48 5,9 6, ,589 16, Beauty & Personal care 1,79 1,66 11, ,489 41, Foods & refreshments 2,96 2,87 3, ,393 9, Others -6 2 (2) (66.7) (2.) (23) (21) 3.3 EBIT margin (%) - Home care Beauty & Personal care Food & refreshments Others (3.6) 1. (1.3) 2.2 (2.4) (2.5) (2.9) (.4) EBIT composition (%) - Home care Beauty & Personal care (3.9) (1.7) (4.4) - Food & refreshments (.4) Others (.3).1 (.1).2 (.2) (.3) (.3) - 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 5: Comparable sales growth category-wise Segments 2QFY18 3QFY18 4QFY18 1QFY19 Home care Beauty & Personal care Refreshment Food Total Hindustan Unilever

4 Conference-call highlights HUVR reported 16% comparable sales growth led by strong volume growth of 12% in 1QFY19. Growth was broad-based as all categories grew in double digits. This was similar to the previous quarter. Home care continues grow in high double digits driven by strong growth in Surf. Also, there were new launches in the home care space during the quarter. It was informed that the water purifier segment, which accounts for a small portion of the home care space, has been struggling. HUVR is growing ahead of the market and its premium segment in the home care space is growing 3x that of mass and medium segments which indicates that it has gained market share. Promotional offers by peers have not been able to affect the growth rate of HUVR. Premiumisation-driven growth in the home care space has lifted the operating margin considerably. The company continues to invest heavily in new categories as well as in existing brands in the personal care space. The mandate is to grow the market and gain market share. Strong double-digit growth in skin care and hair care segments during the quarter led to 17bps YoY margin expansion in the personal care space. Robust growth in food and refreshment business continued, led by its key brands (Knorr, Kissan, tea portfolio, Bru etc). During the quarter, there were new launches in the home care (Domex liquid and powder), personal care (Lakme 9 to 5 Naturale make-up range) segments. The company also launched its exclusive range of men s grooming products under the Brylcream brand with Amazon during the quarter. Exhibit 6 : New launches under the naturals umbrella Source: Company presentation, Nirmal Bang Institutional Equities Research Performance of the naturals portfolio is tracking internal expectations and set to grow 2.5x company average growth rate. Performance of Lever Ayush range and Indu Lekha has been satisfactory. The company also launched a new Lakme make-up range under the naturals umbrella. The management indicated that there is a gradual improvement in underlying demand and the company has been growing ahead of the market led by its own initiatives. As discussed above, operating margin grew 18bps YoY in 1QFY19 (1bps on a comparable basis) led by premiumisation, strong growth across categories, market leadership and cost rationalisation measures. On the raw material side, the management indicated the risk of increase in crude oil prices and further depreciation of the local currency. Prices of other key raw materials like palm oil or vegetable oils have been benign. 4 Hindustan Unilever

5 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Institutional Equities Exhibit 7: Robust volume growth continues Exhibit 8: Improved top-line performance (reported) (%) (2) (4) (6) (1) (4) (Rsmn) (%) 1, , , 7, 1 6, , 6 4, 3, 2, 1, 1.4 (1.) Net Sales (Rs mn) Sales growth (%) Exhibit 9: Strong operating profit trend (Rsmn) (%) 24, , , , 1 16, 5.1 (5.2) 5 14, 12, (5) Exhibit1: Net income trending upwards (Rsmn) 27.8 (%) 16, 26 15, 14, , 16 12, , , EBITDA (Rs mn) EBITDA growth % (1) 1, PAT (Rs mn) PAT Growth % 6 Exhibit 11: Improved margin profile (%) EBITDA margin % PAT margin % (RHS) (%) Exhibit 12: One-year forward P/E (x) YR Fwd PE 5 yr Median PE +1 SD -1SD 5 Hindustan Unilever

6 Financials (standalone) Exhibit 13: Income statement Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E Net Sales 3,1,61 3,18,899 3,45,25 3,91,74 4,45,84 % Growth COGS 1,53,53 1,56,842 1,62,32 1,8,421 2,2,411 Staff costs 15,728 16,198 17,45 18,532 2,387 Advertising costs 36, 34,693 41,5 48,33 54,5 Other expenses 48,338 5,697 51,67 54,73 59,139 Total expenses 2,53,118 2,58,429 2,72,49 3,1,355 3,35,987 EBITDA 57,491 6,47 72,76 89,719 1,9,853 % growth EBITDA margin (%) Other income 5,638 5,259 5,69 6,352 7,364 Interest costs Depreciation 3,28 3,96 4,78 5,119 5,519 Profit before tax (before exceptional items) 59,769 61,554 73,46 9,721 1,11,478 Exceptional items (38) 2,411 (62) (59) - Tax 18,96 19,6 2,48 26,589 31,771 PAT (before exceptional items) 41,673 42,494 52,98 64,133 79,77 PAT 41,365 44,94 52,36 63,543 79,77 PAT margin (%) % Growth (4.6) Exhibit 15: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E Share capital 2,164 2,164 2,164 2,164 2,164 Reserves 6,63 62,74 68,59 71,386 7,13 Net worth 62,794 64,94 7,754 73,55 72,294 Total debt Deferred tax liability (1,68) (1,6) (2,55) (2,55) (2,55) Total liabilities 71,4 73,894 82,584 85,861 86,686 Gross block 31,95 43,19 49,19 53,19 57,19 Depreciation 2,93 6,65 11,43 16,549 22,68 Net block 29,2 36,54 37,76 36,641 35,122 Capital work-in-progress 3,98 5,73 7,96 7,5 7, Investments 3,19 2,6 2,56 3,129 3,567 Inventories 25,28 23,62 23,59 27,818 28,747 Debtors 1,64 9,28 11,47 12,12 12,328 Cash 3,12 19,77 42,24 38,255 42,886 Loans & advances 2,94 3,58 4,1 4,693 5,35 Other current assets 4,87 5,79 5,76 5,866 5,796 Total current assets 95,524 93,654 1,11,394 1,17,282 1,29,882 Creditors 54,98 6,6 7,13 7,785 77,834 Other current liabilities & provisions 11,54 11,96 16,23 17,598 21,4 Total current liabilities 66,52 72,2 86,36 88,384 99,235 Net current assets 29,4 21,634 25,34 28,898 3,648 Total assets 71,4 73,894 82,584 85,861 86,686 Exhibit 14: Cash flow Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY2E PAT 41,365 44,94 52,36 63,543 79,77 Depreciation 3,28 3,96 4,78 5,119 5,519 Other income (5,638) (5,259) (5,69) (6,352) (7,364) (Inc.)/dec. in working capital (786) 7,6 12,21 (2,942) 9,766 Cash flow from operations 43,787 56,464 69,35 65,72 94,991 Capital expenditure (-) (6,622) (13,23) (8,23) (3,54) (3,5) Net cash after capex 37,165 43,234 61,12 62,18 91,491 Interest paid (-) Dividends paid (-) (41,395) (42,929) (51,446) (6,747) (8,962) Inc./(dec.) in total borrowings Inc./(dec.) in investments 2,476 (9,99) 6,684 (5,26) (7,322) Cash from financial activities (39,315) (42,149) (48,66) (6,266) (78,881) Others - 1, Opening cash balance 28,61 3,12 19,77 42,24 38,255 Closing cash balance 3,12 19,77 42,24 38,255 42,886 Exhibit 16: Key ratios Y/E March FY16 FY17 FY18 FY19E FY2E 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

7 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 29 September 217 Buy 1,17 1, October 217 Buy 1,272 1,46 2 December 217 Buy 1,35 1,57 18 January 218 Buy 1,371 1,7 15 May 218 Buy 1,53 1,75 17 July 218 Buy 1,751 2,25 Rating chart Not Covered Covered 7 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 /811, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /813, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : /1; Fax. : Hindustan Unilever