HINDUSTAN UNILEVER Volumes skirt deflationary pressures

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1 RESULT UPDATE HINDUSTAN UNILEVER Volumes skirt deflationary pressures India Equity Research Consumer Goods Hindustan Unilever s (HUL) Q2FY16 numbers came in line with our estimates. Key positives: (i) adjusted 6.5% YoY domestic volume growth (reported growth was 7% YoY due to upstocking done in anticipation of transport strike); (ii) 9.5% YoY growth in personal products (PP) with 17.2% YoY growth in EBIT; (iii) 8 quarters of double digit YoY growth in packaged foods (PF); and (iv) 316bps YoY gross margin expansion led by cooling inflation in commodity basket (PFAD prices down 28% YoY) and cost saving program (~70bps). Key negatives: (i) softer EBITDA margin expansion given 24 quarter high A&P spends (as a % of sales); (ii) 12 quarter low EBIT margin in beverages (HUL is working on cost savings); and (iii) 9 quarter low EBIT margin in soap and detergents (S&D) due to part passage of commodity benefits to counter intense competition and support innovations. Maintain HOLD. Robust volumes make up for fiscal headwinds, price deflation Fiscal headwinds impacted sales growth by 100bps and EBIT by 45bps. Price deflation was seen in S&D, while the remaining portfolio saw modest price increase. In S&D, premium brands performed better than mass brands. Wheel and Close up (struggling earlier) witnessed improvement; actions are being taken in Pepsodent. Hair care saw strong double digit volume led growth despite fiscal headwinds, price cut in shampoo. Key takeaways from conference call In rurban areas, the mix is very similar to Tier 2 and 3 cities. While rural growth was ~1.5x, urban growth came at par; rural outlook is uncertain given erratic monsoon, but HUL believes rural growth has hit a bottom. The company is committed to modest improvement in margins with volume led growth. Ayush is being re launched with aggressive promotion in Ecommerce (exclusive one month tie up with Amazon, later to be more widely available) to be followed by innovation pipeline. Outlook and valuations: Long term positive; maintain HOLD We remain positive on long term prospects of HUL, led by both margin and volume recovery. Key risks intense competition and moderation in rural demand are increasing. At CMP, the stock is trading at 38x FY16E and 33.2x FY17E EPS. We maintain HOLD/SP on the stock with target price of INR865. Financials (INR mn) Year to March Q2FY16 Q2FY15 % change Q1FY16 % change FY15 FY16E FY17E Net rev. 79,554 76, ,051 (1.8) 319, , ,896 EBITDA 13,259 12, ,064 (12.0) 54,137 64,685 74,264 Adjusted profit 9,703 9, ,527 (100) 36,839 45,384 52,023 Dil. EPS (INR) (7.8) Diluted P/E (x) EV/EBITDA (x) ROAE (%) * Quarterly nos. standalone; annual nos. consolidated Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market HOLD Edelweiss Securities Limited Performer Low Underweight MARKET DATA (R: HLL.BO, B: HUVR IN) CMP : INR 797 Target Price : INR week range (INR) : 981 / 707 Share in issue (mn) : 2,163.9 M cap (INR bn/usd mn) : 1,725 / 27,039 Avg. Daily Vol.BSE/NSE( 000) : 1,612.4 SHARE HOLDING PATTERN (%) Current Q1FY16 Q4FY15 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW Consumer Goods Index 1 month months (9.5) (2.6) months Abneesh Roy abneesh.roy@edelweissfin.com Pooja Lath pooja.lath@edelweissfin.com Tanmay Sharma tanmay.sharma@edelweissfin.com October 14, 2015

2 Consumer Goods Table 1: Performance trend across categories at a glance % sales growth (YoY) Q1FY13Q2FY13Q3FY13Q4FY13Q1FY14Q2FY14Q3FY14Q4FY14Q1FY15Q2FY15Q3FY15Q4FY15Q1FY16Q2FY16 Soaps and detergents Personal products Beverages Packaged Food Overall volume growth (% YoY) % EBIT growth (YoY) Q1FY13Q2FY13Q3FY13Q4FY13Q1FY14Q2FY14Q3FY14Q4FY14Q1FY15Q2FY15Q3FY15Q4FY15Q1FY16Q2FY16 Soaps and detergents (4.1) Personal products (1.6) Beverages (2.2) 19.7 (1.8) (11.5) EBIT margins (%) Q1FY13Q2FY13Q3FY13Q4FY13Q1FY14Q2FY14Q3FY14Q4FY14Q1FY15Q2FY15Q3FY15Q4FY15Q1FY16Q2FY16 Soaps and detergents Personal products Beverages Packaged Food (0.8) (3.6) (5.1) Q2FY16 concall Key takeaways Source: Company, Edelweiss research Environment: Overall growth was led by volumes amidst deflationary price environment. In both rural and urban markets, it was similar environment and hence the company remains focussed to drive profitable volume growth. Overall volumes and growth: HUL reported underlying volume growth of 7% YoY. Volume growth was higher by 50bps YoY due to increased volume in pipeline owing to the transport strike. Adjusted for this, volume growth would have been close to 6.5% YoY. There exists room for improvement in volume growth. Deflation has taken place in universally penetrated categories. In 2008, amid benign commodity environment the company posted negative volume growth (volumes fell 7 8%) just because it was 6 months slow in taking a price correction. Over the long term, HUL expects the correlation in growth and GDP to be 1:1. Rural and urban: Even in rural India the product mix has improved. In rurban areas, the mix is very similar to Tier 2 and 3 cities. The tendency to migrate to premium brands is much higher in a benign commodity environment. Rural growth needs to be watched with monsoons being challenging. Rural growth, which was running at x that of urban, has come to similar levels now. The outlook for rural remains uncertain and the company witnessed stress in rural areas in Q2FY16. It believes the decline in rural growth is now at the bottom and appears to have bottomed out. Cost savings: Out of the 320bps YoY gross margin expansion, ~70bps YoY expansion has come from the cost saving program. Elasticity: Elasticity of volume growth is lower in high penetrated categories. Pricing: If the commodity prices remain constant, then once anniversarisation happens the price decline will erase and with price growth in other portfolio will increase overall price growth. Once commodity prices move up, HUL will be well poised to pass on the price 2 Edelweiss Securities Limited

3 Hindustan Unilever increase which is helped by the benefits arising from the Winning in Many India strategy. Benign pricing also helps premiumisation of the portfolio, which will lead to better mix and hence better growth. Higher growth in PP will help better mix and margins. The company is committed to modest improvement in margins in all scenarios. 50% of the portfolio (S&D) has seen price deflation with the other half witnessing price increase. Soaps and detergents (S&D): This segment witnessed growth of 1.6% YoY (3% YoY ex of phasing off excise duty benefits), while EBIT declined by 4.1% YoY. Dove, Pears, Hamam and Lifebuoy saw double digit volume growth. Growth in laundry segment was led by Surf (one of the strongest growth momentum in Q2FY16) and Rin. Growth in this segment was impacted by phasing out of excise duty and price deflation owing to soft commodity prices. Wheel performance saw improvement. Premium brands fared better than mass market brands. HUL has re launched Lux in a significant manner and whenever relaunch is done pipeline correction takes place which temporarily impacts volume growth. Retention level of Dove by the customer is very high. S&D has seen significant gross margin expansion so the company has used the benefits for developing the market and brand investment. Personal products (PP): The segment reported growth of 9.5% YoY (11% YoY ex phasing off excise duty benefits), while EBIT growth came in at 17.2% YoY with 171bps margin expansion. Fair and Lovely continued to do well, while performance of Pond s was led by premium skin lightening and Lakme by Perfect Radiance and CC cream. HUL s hair care segment saw strong double digit volume led growth (strong double digit growth despite excise correction and price cuts in shampoos) across format with good performance by Dove and TRESemme. Hair care has seen growth across formats. Oral care recovery is in progress. Close Up saw double digit growth (helped by activations), while performance of Pepsodent was subdued. However, the company is confident of turnaround happening in Pepsodent in couple of quarters (HUL is aware of the area where improvement is required). Lakme delivered double digit growth across core, Absolute and 9 to 5 ranges. Shampoo: The company accounts for 50% of the hair care market. Shampoo witnessed significant pick up in volumes. Deodorant: Saw one of the largest innovations for the company and met with very good response. Beverages: Growth in this segment came in at 5.9% YoY with EBIT declining by 11.5% YoY. Margins fell by 285bps YoY. Red Label continues to lead category performance, while Taaza (taken price corrections) saw pick up. Growth in green tea continues. Growth in coffee was led by Bru Gold. The impact on margins was due to: (i) tea has seen some inflation; and (ii) A&P spends have increased in this segment. Tea growth has been in terms of volume and price. With pipeline correction in Taj and alignment in costs, growth in tea will be back. Packaged foods: This segment saw double digit growth (eighth successive quarter of double digit growth) of 12.4% YoY with 34.5% YoY EBIT growth. Growth was driven by all the key brands Kissan sustained robust activation led growth across both ketchups and jams, while Knorr growth was led by strong performance by instant soups. HUL has a lot of new offerings in the pipeline in this space. Water: This business was helped by performance of the Ecommerce channel. Overall performance was however, subdued. 3 Edelweiss Securities Limited

4 Consumer Goods A&P: HUL has done substantial investment and recorded one of the highest A&P quarter. A&P expenses increased by 225bps YoY moving up 23.8% YoY. Higher A&P signifies commitment towards building the market and passing on benefits to consumers. A&P increase was also due to the fact there was higher innovation in the S&D segment in Q2FY16. The company has been investing for market development so that the mix improvement continues. A&P spend will depend on competitive scenario and affordability. TV spends, which used to be 90%, is now down to ~70% as digital spends have increased. The increase was uniform in advertisement and promotion. Competition: Competitive intensity continues to remain high. HUL is agile in responding to market by making sure that it protects it share. The company is seized of the fact that the commodity cycle changes at a faster pace these days. Excise impact: Phasing off of the excise benefit impacted revenue growth by 100bps YoY (ex this, underlying growth would have been 6% YoY). On EBIT, the impact was 45bps YoY. Tax rate increased by 189bps YoY. The impact will continue till early part of Q4FY16, though the impact will taper off. The impact in Q3FY16 can be 70 80bps and 30 40bps YoY in Q4FY16. Toni and Guy: HUL is satisfied with performance of this brand till now. Ayush: This brand was launched in 2000 s but that launch was ahead of time. Now is a correct time to launch. Initially, HUL will only go for Ecommerce launch and has a lot of innovation and new launches here. It is already launched in Amazon and will be extended to other Ecommerce companies as well. Commodity costs: Remains benign. PFAD has dipped to average price of INR31.9 per kg from INR41.6 in Q1FY16. Commodity price collapse has happened and is now stabilising. Taxation: Will remain in the region of 31.5%. From FY17, the increase in tax rate will stabilise. Debtor days: Have risen because of the change in the mix of the channel with higher growth in modern trade and CSD. The increase is not because of the credit crunch in the rural market. Q1FY16 concall Key takeaways Market environment: Management believes the pace of market recovery will be largely dependent on rural areas. Rural has witnessed some slowdown recently; rural and urban growth rates are now at par. Rural growth should ideally outpace urban growth because 70% of the Indian population resides in rural areas, while it represent only one third of the market. Market data is showing some discrepancy as it is reflecting pricing growth in the S&D space which is not true. HUL believes there is some lag in correct reflection of pricing action (price cut which HUL took in December 2014 in S&D is likely to reflect with 9 months lag). The rural share of income for the company is 40 45% including indirect coverage and ~35% for direct coverage. 4 Edelweiss Securities Limited

5 Hindustan Unilever Phasing of fiscal benefits: The impact during Q1FY16 was 170bps YoY on top line and 65bps on PBIT. Fiscal phasing impact will fade by 50bps every quarter each in Q2FY16 and Q3FY16; from Q4FY16 it will come into base. The impact is predominantly soaps and personal products category. HUL will pass on the impact on phasing out of excise benefit in a phased manner at an appropriate time. Volume growth: HUL registered volume growth of 6% YoY ahead of the market. Soaps and detergents (S&D): The S&D portfolio was flattish YoY (2% YoY ex fiscal headwind) while margin in this segment expanded 169bps YoY. Volume growth is extremely healthy across S&D. Growth in the skin cleansing category was driven by premium soaps, double digit volume growth in Dove and liquid handwash led by Lifebuoy. Mass soaps segment is facing some slowdown pressure led by rural slowdown; HUL is taking actions to improve growth in this segment. Though many small players have mushroomed in the soaps space with raw material deflation, the company has not lost share to them. HUL s effective price deflation in S&D was 2% YoY in Q1FY16. Surf saw volume led double digit growth while performance of Rin in bars and powder was also strong. Wheel continues to remain soft aggravated by a slowing mass market, but the company remains committed towards the brand which is INR25bn brand for the company. Rural slowdown has had a significant bearing on Wheel s performance, further aggravated by price volatility due to reducing raw material prices. The core issue has been sorted out and execution will reflect in 3 6 months. Personal Products (PP): PP portfolio registered strong growth of 11.4% YoY (15% YoY exfiscal headwind) while margins in this segment grew a robust 201bps YoY. Skin care portfolio saw double digit growth in FAL, Ponds, Lakme, Vaseline. Growth in Pond s was led by premium skin lightening and talc. This category showed strong performance despite phasing out of excise benefits. Hair care also delivered double digit growth across brands and formats. This category showed strong performance despite phasing out of excise benefits. Close Up clocked double digit growth driven by activations and micromarketing while growth in Pepsodent was driven by Gum care and Clove & Salt variants. Pepsodent continues to perform below company expectations. HUL has taken corrective action, likely to bear fruit in 3 6 months. Lakme sustained strong performance led by premium make up. Margin improvement was led by reduction in packaging costs (constitutes significant cost in PP) due to correction in crude oil prices and leverage coming into play on A&P costs which are largely fixed in nature for PP category. Modest margin improvement should continue. Beverages: Beverages revenue increased 9.4% YoY, while margins declined 60bps YoY. Tea segment delivered double digit growth with healthy volumes. High growth momentum was 5 Edelweiss Securities Limited

6 Consumer Goods sustained in Lipton Green Tea and Red Label. Coffee growth was led by more than 2x growth in Bru Gold. Retail coffee sales have done well, though sales could have performed better. Packaged foods: Packaged foods delivered seventh consecutive quarter of double digit growth at 11.8% YoY. Kissan delivered one of the strongest quarters led by both ketchups and jams. Kwality and Magnum delivered good growth. Knorr exhibited strong growth despite Nestle issue. Gross margins: Gross margins rose 376bps YoY. A&P spends: A&P spends increased by 22% YoY to support innovation and to remain competitive. A&P was especially high in the S&D space. Both ad and promotion grew and the ratio was largely maintained YoY. Other costs: Royalty increase (40bsp YoY) impact was largely offset by saving in supply chain. Outlook and valuations: Long term positive; maintain HOLD We continue to remain positive on HUL's ability to grow ahead of the market and its pricing power due to initiatives in distribution expansion (direct coverage increased from 0.9mn in 2009 to 3.2mn in 2013) and product innovations. Commodity price correction will continue to aid gross margin expansion in FY16, though we expect partial benefit to be continued to be passed on to customers via promotional offers/select price cuts to keep competition at bay. Cost savings and mix improvement will help margins to improve structurally. With likely urban recovery, the company (higher urban exposure at 55%) is well placed to benefit. We expect higher investment in A&P to support brand equity, aid market development for future categories and to counter pick up in competitive intensity. Key monitorables: (i) rural growth which may moderate due to erratic rainfall, slowdown in rural wage growth, muted hikes in support prices for crops; and (ii) increase in competitive intensity due to softer commodity prices. However, with an anticipated recovery in urban demand and commodity correction to aid EBITDA margin expansion, we expect HUL to potentially benefit. We maintain target P/E of 36x FY17E EPS arriving at a target price of INR865. We maintain 'HOLD/ Sector Performer'. 6 Edelweiss Securities Limited

7 Hindustan Unilever Chart 1: Overall volume growth at 7% YoY (%) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Chart 2: A&P spends up 225bps YoY (% of sales) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Chart 3: Category wise contribution Sales Packaged Food 6% Beverages 12% Q2FY16 revenue split Others (includes Chemicals, Water etc) 4% Soaps and Detergents 48% Packaged Food 6% Beverages 12% Q2FY15 revenue split Others (includes Chemicals, Water etc) 5% Soaps and Detergents 49% Personal Products 30% Personal Products 28% Source: Company, Edelweiss research 7 Edelweiss Securities Limited

8 Consumer Goods Chart 4: Category wise contribution EBIT Packaged Food 2% Beverages 11% Personal Products 48% Q2FY16 EBIT contribution Others (includes Chemicals, Water etc) 1% Soaps and Detergents 38% Beverages 13% Personal Products 43% Q2FY15 EBIT contribution Packaged Food 1% Others (includes Chemicals, Water etc) 1% Soaps and Detergents 42% Chart 5: S&D YoY revenue up 1.6% YoY 30.0 Chart 6: S&D margin down 77bps YoY 18.0 (S&D sales growth %) (S&D margins %) Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Chart 7: PP revenue growth at 9.5% YoY 20.0 (PP sales growth %) Chart 8: PP margin up 171bps YoY Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 (PP margins %) Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Source: Company, Edelweiss research 8 Edelweiss Securities Limited

9 Hindustan Unilever Chart 9: Beverages sales at 5.9% YoY 20.0 Chart 10: Beverages margin down 285bps YoY 20.0 (Beverages sales growth %) (Beverages margins %) Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Chart 11: PF sales growth grew by 12.4% YoY 20.0 (Packaged Food sales growth %) Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Chart 12: PF margins up 87bps YoY (4.0) (8.0) Chart 13: Palm oil prices trend 4,000 3,500 3,000 2,500 2,000 1,500 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 (PPackaged Food margins %) Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 (MYR/MT) Source: Company, Edelweiss research 9 Edelweiss Securities Limited

10 Consumer Goods Table 2: Segmental performance Year to March Revenues (INR mn) Q2FY16 Q2FY15 YoY growth Q1FY16 QoQ growth Soaps and Detergents 38,166 37, ,544 (1.0) Personal products 23,456 21, ,056 (2.5) Beverages 9,526 8, , Packaged food 5,071 4, ,079 (16.6) Others (includes chemicals, water etc) 3,243 3,618 (10.4) 3, Segment results (Profit/(Loss) before tax and interest) Soaps and Detergents 4,903 5,112 (4.1) 5,980 (18.0) Personal products 6,119 5, ,130 (14.2) Beverages 1,378 1,557 (11.5) 1,435 (4.0) Packaged food (50.6) Others (includes chemicals, water etc) (9.9) (46) NM Segment margins Margin (%) Soaps and Detergents (77) 15.5 (267) Personal products (355) Beverages (285) 15.7 (122) Packaged food (365) Others (includes chemicals, water etc) NM (1.5) NM Source: Company, Edelweiss research Chart 14: One year forward P/E chart 1, Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 (INR) 45x 40x 35x 30x 25x 20x Source: Edelweiss research 10 Edelweiss Securities Limited

11 Hindustan Unilever Financial snapshot (INR mn) Year to March Q2FY16 Q2FY15 % change Q1FY16 % change YTD16 FY16E FY17E Net revenues 79,554 76, ,051 (1.8) 160, , ,896 Cost of goods sold 38,995 39,590 (1.5) 39,020 (0.1) 78, , ,570 Gross profit 40,559 36, ,031 (3.5) 82, , ,327 Staff costs 3,808 4,130 (7.8) 3, ,443 18,587 20,191 Advt. sales & promotions 11,450 9, ,534 (0.7) 22,984 44,888 49,487 Other expenses 12,042 11, , ,840 52,253 59,384 Total expenditure 27,301 24, , , , ,062 EBITDA 13,259 12, ,064 (12.0) 28,323 64,685 74,264 Depreciation & amortization (0.3) ,511 3,333 3,603 EBIT 12,497 11, ,315 (12.7) 26,812 61,352 70,661 Other income 1,702 1,978 (14.0) 1, ,788 5,715 6,190 Interest 63 (99.5) 1 (57.1) Add: Prior period items Add: Exceptional items (81) 312 NA 65 NA (16) 65 Profit before tax 14,199 13, ,400 (7.8) 29,599 66,916 76,701 Provision for taxes 4,495 4, ,874 (7.8) 9,369 21,413 24,544 Minority interest Share in profit from associates Reported net profit 9,622 9,882 (2.6) 10,591 (9.1) 20,214 45,449 52,023 Adjusted Profit 9,703 9, ,527 (7.8) 20,230 45,384 52,023 Adjusted Diluted EPS As % of net revenues COGS Employee cost Adv. & sales promotions Other expenditure EBITDA EBIT PBT Reported net profit Tax rate Edelweiss Securities Limited

12 Consumer Goods Company Description HUL, the largest FMCG Company in India, was formed by merging three subsidiaries of Unilever in At present, Unilever Plc holds a 67.2% stake in the company. HUL s portfolio of products covers a wide spectrum including soaps, detergents, skin creams, shampoos, toothpastes, tea, coffee, packaged foods and branded atta. Powerful brands and an envious distribution network (direct coverage of 3.2mn outlets) are HUL s primary strengths. The company operates through segments soaps & detergents, personal products, beverages, foods, exports, and other operations. Investment Theme HUL is a play on consumption growth in India. The company has displayed its ability to effect price hikes and ability to grow ahead of market, which, combined with improved outlook for S&D and personal care, and strong growth in processed foods and beverages, boosts our positive outlook on the company. We like its revenue growth from a medium to long term perspective. Commodity price correction will aid gross margin expansion though we expect partial benefit to be passed on to customers through promotional offers/select price cuts. We expect higher investment in A&P to support brand equity and counter pick up in competitive intensity (especially from regional players). However with an anticipated recovery in urban demand and commodity correction to aid EBITDA margin expansion, we expect HUL to potentially benefit. Key Risks Depreciation in rupee impacts price of imported raw materials. Ad spends likely to spike due to increased competition from regional players. Maintaining market share will also be a challenge for HUL. The price war in HUL s popular segments with new entrants entering the fray could hit the company hard. 12 Edelweiss Securities Limited

13 Hindustan Unilever Financial Statements Key Assumptions Year to March FY14 FY15 FY16E FY17E Macro GDP(Y o Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Volume gr. (overall) Pricing gr. (overall) Growth in Soaps Growth in Detergents Growth in PP Growth in beverages Growth in packaged foods EBITDA margin (%) EBITDA margin assumptions Oils, fats and resins as % of COGS Chemicals and perfumes as % of COGS Tea and Green leaf as % of COGS Selling and distribution costs A&P as % of sales Employee cost as % of sales Financial assumptions Tax rate (%) Capex (INR mn) 5,800 3,329 1,987 4,500 Debtor days Inventory days Payable days Cash conversion cycle (days) (55) (51) (52) (52) Depreciation as % of gross block Yield on cash Income statement (INR mn) Year to March FY14 FY15 FY16E FY17E Net revenue 285, , , ,549 Other Operating Income 6,943 7,725 8,497 9,347 Total operating income 292, , , ,896 Materials costs 148, , , ,570 Gross profit 143, , , ,327 Employee costs 15,727 17,239 18,587 20,191 Other Expenses 43,707 47,149 52,253 59,384 Advertisement & sales costs 36,747 39,436 44,888 49,487 EBITDA 47,457 54,137 64,685 74,264 Depreciation & Amortization 2,955 3,224 3,333 3,603 EBIT 44,501 50,913 61,352 70,661 Add: Other income 5,701 5,667 5,715 6,190 Less: Interest Expense Add: Exceptional items 2,356 6, Profit Before Tax 49,796 56,403 66,916 76,701 Less: Provision for Tax 12,594 19,440 21,413 24,544 Less: Minority Interest Reported Profit 39,456 43,631 45,449 52,023 Less: Exceptional Items (Net of 2,356 6, Adjusted Profit 37,100 36,839 45,384 52,023 No. of Shares outstanding (mn) 2,163 2,163 2,163 2,163 Adjusted Basic EPS No. of Diluted shares outstanding 2,163 2,164 2,164 2,164 Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio (%) Common size metrics Year to March FY14 FY15 FY16E FY17E Materials costs Staff costs Advertising & sales costs Interest Expense EBITDA margins Net Profit margins Growth ratios (%) Year to March FY14 FY15 FY16E FY17E Revenues EBITDA Adjusted Profit 15.1 (0.7) EPS 15.1 (0.8) Edelweiss Securities Limited

14 Consumer Goods Balance sheet (INR mn) As on 31st March FY14 FY15 FY16E FY17E Share capital 2,163 2,164 2,164 2,164 Reserves & Surplus 33,210 38,053 42,736 48,097 Shareholders' funds 35,373 40,216 44,900 50,260 Minority Interest Total Borrowings Long Term Liabilities & Provisions 12,692 11,718 11,718 11,718 Deferred Tax Liability (net) (1,796) (1,994) (1,994) (1,994) Sources of funds 46,948 50,619 55,421 60,915 Gross Block 49,977 53,306 57,806 62,306 Net Block 26,409 27,178 28,345 29,241 Capital work in progress 3,649 5,163 2,650 2,650 Intangible Assets 1,130 1,032 1,032 1,032 Total Fixed Assets 31,188 33,373 32,027 32,923 Non current investments 3,802 3,239 3,239 3,239 Cash and cash equivalents 49,740 53,907 61,923 68,944 Inventories 29,398 28,488 30,323 34,293 Sundry Debtors 10,168 10,112 11,049 12,473 Loans & Advances 10,513 12,340 12,340 12,340 Other Current Assets Total Current Assets (ex cash) 51,013 51,791 54,564 59,958 Trade payable 58,249 55,073 59,713 67,531 Other Current Liabilities & Short 30,546 36,618 36,618 36,618 Total Current Liabilities & 88,795 91,692 96, ,150 Net Current Assets (ex cash) (37,782) (39,900) (41,768) (44,191) Uses of funds 46,948 50,619 55,421 60,915 Book Value per share (INR) Free cash flow (INR mn) Year to March FY14 FY15 FY16E FY17E Reported Profit 39,456 43,631 45,449 52,023 Add: Depreciation 2,955 3,224 3,333 3,603 Interest (Net of Tax) Others (6,823) (13,524) Less: Changes in WC (2,290) 2,209 (1,868) (2,424) Operating cash flow 38,182 31,238 50,854 58,334 Less: Capex 5,800 3,329 1,987 4,500 Free Cash Flow 32,382 27,909 48,867 53,834 Cash flow metrics Year to March FY14 FY15 FY16E FY17E Operating cash flow 38,182 31,238 50,854 58,334 Investing cash flow (4,750) 3,061 (1,987) (4,500) Financing cash flow (29,603) (34,624) (40,851) (46,812) Net cash Flow 3,829 (325) 8,016 7,021 Capex (5,800) (3,329) (1,987) (4,500) Dividend paid (32,730) (38,812) (40,766) (46,662) Profitability and efficiency ratios Year to March FY14 FY15 FY16E FY17E Return on Average Equity (ROAE) Pre tax Return on Capital Inventory Days Debtors Days Payable Days Cash Conversion Cycle (55) (51) (52) (52) Current Ratio Gross Debt/EBITDA Net Debt/Equity (1.4) (1.3) (1.4) (1.3) Interest Coverage Ratio Operating ratios Year to March FY14 FY15 FY16E FY17E Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Year to March FY14 FY15 FY16E FY17E Adjusted Diluted EPS (INR) Y o Y growth (%) 15.1 (0.8) Adjusted Cash EPS (INR) Diluted Price to Earnings Ratio Price to Book Ratio (P/B) (x) Enterprise Value / Sales (x) Enterprise Value / EBITDA (x) Dividend Yield (%) Peer comparison valuation Market cap Diluted Price to Earnings Enterprise Value / EBITDA (X) Return on Average Equity Name (USD mn) FY16E FY17E FY16E FY17E FY16E FY17E Hindustan Unilever 27, Colgate 3, Dabur 7, Emami 3, GlaxoSmithKline Consumer Healthcare 3, Godrej Consumer 6, Marico 3, Nestle Ltd 9, AVERAGE Source: Edelweiss research 14 Edelweiss Securities Limited

15 Additional Data Hindustan Unilever Directors Data Mr. Harish Manwani Chairman Mr. Sanjiv Mehta Managing Director and Chief Executive Officer Mr. Sridhar Ramamurthy Executive Director, Finance & IT and Chief Financial Officer Mr. Pradeep Banerjee Executive Director, Supply Chain Mr. A. Narayan Independent Director Mr. S. Ramadorai Independent Director Mr. R. A. Mashelkar Independent Director Mr. O. P. Bhatt Independent Director Dr. Sanjiv Misra Independent Director Auditors M/s. Lovelock & Lewes *as per last annual report Holding Top10 Perc. Holding Perc. Holding Life Insurance Corp Of India 1.1 Vanguard Group Inc 1.0 Aberdeen Asset Management Asia 0.9 Blackrock Fund Advisors 0.9 Virtus Investment Advisers Inc 0.7 Aberdeen Asset Management Plc 0.6 William Blair & Company Llc 0.5 Vontobel Asset Management Ag 0.4 Bajaj Allianz Life Insurance Co 0.3 Lyxor International Asset Mgmt 0.2 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *in last one year 15 Edelweiss Securities Limited

16 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Asian Paints BUY SO M Bajaj Corp HOLD SP H Colgate HOLD SP M Dabur BUY SO M Emami BUY SO H GlaxoSmithKline Consumer HOLD SP M Healthcare Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L ITC HOLD SU M Marico BUY SO M Nestle Ltd REDUCE SU L Pidilite Industries BUY SO M United Spirits BUY SO H ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 16 Edelweiss Securities Limited

17 Hindustan Unilever Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91 22) , Nirav Sheth Head Research Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits Recent Research Date Company Title Price (INR) Recos 08 Oct 15 Bajaj Corp Resilient margin boosts show; Result Update 440 Hold 06 Oct 15 Consumer Goods Margin succour; Result preview 01 Oct 15 Colgate Palmolive MD meeting: Sharpening bite; Visit Note 962 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12 month period appreciate up to 15% over a 12 month period depreciate more than 5% over a 12 month period One year price chart 1,172 1,052 (INR) Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Hindustan Unilever 17 Edelweiss Securities Limited

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