Hindustan Unilever Ltd (HUVR IN) Gross margin pressure managed well

Transcription

1 INSTITUTIONAL EQUITY RESEARCH Hindustan Unilever Ltd (HUVR IN) Gross margin pressure managed well INDIA FMCG Quarterly Update Top takeaways from Q2FY19 HUL saw its fourth consecutive quarter of double digit volume growth (+1% and ahead of consensus estimate of 8 9%) as rural areas outperformed urban. Performance across segments was broad based. Gross margin pressures (down 6bps yoy) were very well managed as its strategy of focussing on reducing cost inefficiencies, zero based budgeting, building responsive and agile supply chains is delivering required results. Other expenses remained flat and declined 16 bps (% of sales) yoy. Adjusted PAT grew 23% yoy, much above our estimate due to higher other income (up 5% yoy) and lower taxation (tax rate down c.11bps). Other income was higher (up 5%) due to interest on a prior period tax assessment order and accounting of a government grant (earlier recorded in other income ). Conference call takeaways Competitive intensity has cooled off marginally across categories. Oral care segment is still not meeting its internal expectations; however, central and north India did exceedingly well. Purifier business was impacted as the market is seeing a shift from gravity (HUL has higher salience) towards electronic / RO. Personal wash: Premium brands continue to do well; however, there are lot of opportunities to improve the growth rate in Lux and Lifebuoy. Ice cream business: Management highlighted the acquisition of Adityaa Milk Ice Creams, which provides a differentiated business model. It will focus on its core market (Karnataka) along with adjoining markets of Maharashtra, Goa, and Kerala. Beverages: Coffee continued to do well; launched Taaza (mass market) tea brand in Punjab, which provides an opportunity to upgrade customers from loose tea. Gross margin pressure / high base to moderate performance in 2HFY19; maintain Neutral We believe HUL has all the right ingredients (1) management focus on premiumization, (2) strengthening core categories, (3) improving distribution productivity using digital means, and (4) foray into under penetrated fast growing categories to sustain high single digit volume growth in the medium term. However, it may not be in position to fully pass on inflationary pressure in RM as consumers prefer to cut discretionary spending (relevant for its personal care portfolio) and as volume growth is tapering to mid single digits from 2HFY19 (due to a high base). We believe its current valuation (5x FY2 EPS) does not fully factor these risks and we maintain Neutral with a target of Rs 1,76 (5x Dec 2 EPS) vs. Rs 1,72 (5x Sept 2 EPS) earlier. 12 October 218 Neutral (Maintain) CMP RS 1569 / TARGET RS 176 (13%) COMPANY DATA O/S SHARES (MN) : 2165 MARKET CAP (RSBN) : 3396 MARKET CAP (USDBN) : WK HI/LO (RS) : 188 / 1217 LIQUIDITY 3M (USDMN) : 38.4 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18 PROMOTERS : FII / NRI : FI / MF : NON PRO : PUBLIC & OTHERS : KEY FINANCIALS Rs mn FY19E FY2E FY21E Net Sales 3,9,45 4,38,671 4,92,847 EBIDTA 85,178 96,582 1,9,478 Net Profit 61,361 69,323 78,325 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Vishal Gutka ( ) vgutka@phillipcapital.in Preeyam Tolia ( ) ptolia@phillipcapital.in (Rs mn) 2QFY19 2QFY18 yoy 1QFY19 qoq Vs. PC e% Comments growth % Volume Rural outperformance vs. urban; WIMI strategy drives volume growth Net Sales 91,38 81, ,56 (2.3).9 Gross Profits 47,3 42, ,92 (5.8) (1.) Gross Margin (%) bps bps 132 bps Staff costs 4,38 4,35.7 4,42 (.9) 1. Ad spends 11,6 1, ,53 (4.1) 15. Other operating expenses 12,36 12,4 (.3) 12,77 (3.2) 15. EBITDA 2,19 16, ,51 (1.3) (17.) EBITDA margin (%) bps bps 571 bps RM pressure managed well by cutting down inefficiencies PBT 21,52 18, ,93 (1.9) (34.7) Tax rate (%) bps bps 331 bps Adj PAT 15,22 12, ,67 (2.9) (34.7) Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Segment operating performance Rs mn Q2FY19 Q2FY18 Yoy growth * Segmental Revenue (Rs mn) Home Care 3,8 27, % Personal Care 43,16 39,1 1.4% Foods & Refreshments 17,4 15,4 13.3% Others 1,34 1,5 1.7% Total 92,34 83,3 11.2% * Comparable sales growth Segment EBIT (Rs mn) Home Care 4,92 3, % Personal Care 11,15 9, % Foods & Refreshments 2,88 2, % Others % Total 18,97 15, % Segment EBIT margins (%) Home Care Personal Care Foods & Refreshments Others 1.5 (4.) EBIT Margins Source: Company, PhillipCapital India Research Double digit volume growth continues Volume (%) Home care Ebit gr (%) (.7) Beauty & Personal Ebit gr (%) Food & Refreshment (7.) 1 2 (8.6) Source: Company, PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Con call takeaways Though rural grew ahead of urban, its growth has slowed down to 1.2x of urban growth from 1.5x earlier. Crude and currency headwinds remain key risks ahead. HUL will take a calibrated price hike depending upon market condition and inflation. Competition intensity stays, but it has slowed down. HUL expects competition to decelerate further in the later part of H2FY19. Aayush is doing well in southern regions, but it needs to tweak the either product formulation or pricing mix for the rest of the regions. Home care Double digit volume growth continues, driven by fabric wash and household care (Domex). Premiumization and new market development led to doubledigit growth in fabric wash. Rin saw strong growth driven by a water conservation campaign in Tamil Nadu. HUL launched Domex Pick up the Brush ad campaign in south India to spread awareness (that cleaning toilets is not taboo) and it has teamed up with southern superstars Nagarjuna, Venkatesh, and Rana Daggubatti for this campaign. Personal care Personal wash growth was driven by its premium portfolio (Dove and Pears), but LUX and Lifebuoy will see more action in coming quarters in terms of new activation and innovation, as there plenty of opportunity to improve growth rates. HUL launched Lifebuoy Rs 5 packs in West Bengal, Gujarat, and Maharashtra. Strong performance in skin care continues across segments and subsegments. Men s Fair & Lovely was relaunched in Q2 and was well received by consumers. TRESemme was re launched after it completed five years in India with the proposition of superior fragrance and packaging. Problems in oral care continue as it is performing below management expectations; however, central and north regions performed well. Impressive growth in deodorants was led by strong performance of innovations in Rexona and Axe (by launching Axe Ticket). Foods & Refreshment Acquired Adityaa Milk Ice cream in Karnataka; HUL will leverage its distribution and business model to increase its penetration in south and adjoining regions. It will eventually place Aadityaa with Kwality Walls. Launched Brooke Bond Taaza in Punjab; is seeing good upgradation from loose tea. Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Financials Income Statement Y/E Mar, Rs mn FY18 FY19E FY2E FY21E Net sales 3,39,26 3,9,45 4,38,671 4,92,847 Growth, % Other operating income 5,99 5,92 5,61 6,161 Total income 3,45,25 3,95,542 4,44,272 4,99,8 Raw material expenses 1,62,32 1,89,914 2,13,654 2,4,36 Employee expenses 17,45 19,195 21,115 23,226 Other Operating expenses 92,72 1,1,254 1,12,922 1,25,943 EBITDA (Core) 72,76 85,178 96,582 1,9,478 Growth, % Margin, % Depreciation 4,78 5,667 6,567 7,567 EBIT 67,98 79,511 9,15 1,1,911 Growth, % Margin, % Interest paid Other Income 5,69 7,113 7,824 8,66 Non recurring Items 62 Pre tax profit 72,85 86,424 97,639 1,1,317 Tax provided 2,48 25,63 28,315 31,992 Profit after tax 52,37 61,361 69,323 78,325 Others (Minorities, Associates) Net Profit 52,37 61,361 69,323 78,325 Growth, % Net Profit (adjusted) 52,37 61,361 69,323 78,325 Unadj. shares (m) 2,16 2,16 2,16 2,16 Wtd avg shares (m) 2,16 2,16 2,16 2,16 Balance Sheet Y/E Mar, Rs mn FY18 FY19E FY2E FY21E Cash & bank 33,73 47,874 66,455 91,255 Marketable securities at cost 28,55 28,55 28,55 28,55 Debtors 11,47 13,21 14,831 16,663 Inventory 23,59 27,149 28,844 31,56 Other current assets 14,5 14,5 14,5 14,5 Total current assets 1,11,39 1,3,825 1,52,73 1,81,574 Investments Gross fixed assets 52,67 6,67 7,67 8,67 Less: Depreciation 11,25 16,917 23,484 31,51 Add: Capital WIP 4,3 4,3 4,3 4,3 Net fixed assets 45,72 48,53 51,486 53,919 Non current assets 4,88 4,88 4,88 4,88 Total assets 1,71,49 1,93,258 2,18,596 2,49,873 Current liabilities 86,36 97,442 1,1,679 1,27,198 Provisions 7,72 8,885 9,982 11,215 Total current liabilities 94,8 1,6,327 1,2,661 1,38,413 Non current liabilities 6,66 6,66 6,66 6,66 Total liabilities 1,,74 1,12,987 1,27,321 1,45,73 Paid up capital 2,16 2,16 2,16 2,16 Reserves & surplus 68,59 78,111 89,114 1,2,639 Shareholders equity 7,75 8,271 91,274 1,4,799 Total equity & liabilities 1,71,49 1,93,258 2,18,596 2,49,873 Cash Flow Y/E Mar, Rs mn FY18 FY19E FY2E FY21E Pre tax profit 72,85 86,424 97,639 1,1,317 Depreciation 4,78 5,667 6,567 7,567 Chg in working capital 8,89 6,957 11,1 13,78 Total tax paid 21,43 25,63 28,315 31,992 Other operating activities 5,93 Cash flow from operating activities 59,16 73,984 86,9 99,61 Capital expenditure 8,23 8, 1, 1, Chg in investments 4 Chg in marketable securities 6,64 Other investing activities 11,9 Cash flow from investing activities 12,64 8, 1, 1, Free cash flow 46,52 65,984 76,9 89,61 Equity raised/(repaid) 1 Dividend (incl. tax) 46,51 51,84 58,32 64,8 Other financing activities 1 Cash flow from financing activities 46,51 51,84 58,32 64,8 Net chg in cash 1 14,144 18,58 24,81 Opening cash balance 16,71 33,73 47,874 66,455 Closing cash balance 33,73 47,874 66,455 91,255 Valuation Ratios FY18 FY19E FY2E FY21E Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) (88.2) (56.3) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) (.1) (.1) (.1) (.1) Receivable days Inventory days Payable days Working capital days (4.1) (4.2) (44.1) (48.5) Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Net debt/equity (%) (47.7) (59.6) (72.8) (87.1) Valuation PER (x) PEG (x) y o y growth Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, PhillipCapital India Research Estimates Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Stock Price, Price Target and Rating History N (TP 172) B (TP 165) B (TP 167) N (TP 1215) N (TP 17) N (TP 13) B (TP 1585) S (TP 73) S (TP 73) S (TP 83) S (TP 765) N (TP 87) N (TP 87) N (TP 17) 7 O 15 D 15 J 16 M 16 M 16 J 16 A 16 S 16 N 16 D 16 F 17 M 17 N (TP J 17 A 17 O 17 N 17 J 18 F 18 A 18 M 18 J 18 A 18 17) Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 5 PHILLIPCAPITAL INDIA RESEARCH

6 Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance. This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No 1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for No investment banking transaction by PCIL 2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of No the company(ies) covered in the Research report 3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No 4 PCIL or its affiliates have managed or co managed in the previous twelve months a private or public offering of securities for the No company(ies) covered in the Research report 5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months No Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results. Page 6 PHILLIPCAPITAL INDIA RESEARCH

7 Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do s and Don ts before investing. Kindly note that past performance is not necessarily a guide to future performance. For Detailed Disclaimer: Please visit our website For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer. If Distribution is to Australian Investors This report is produced by PhillipCapital (India) Pvt Ltd and is being distributed in Australia by Phillip Capital Limited (Australian Financial Services Licence No ). This report contains general securities advice and does not take into account your personal objectives, situation and needs. Please read the Disclosures and Disclaimers set out above. By receiving or reading this report, you agree to be bound by the terms and limitations set out above. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately. PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 413 Page 7 PHILLIPCAPITAL INDIA RESEARCH