2QFY19 Result Update Institutional Equities Hindustan Unilever 15 October 2018 Reuters: HLL.BO; Bloomberg: HUVR IN Best Proxy In A VUCA World Hindustan Unilever s (HUVR) overall performance in 2QFY19 was broadly in line with our expectations. The company reported yet another quarter of strong volume-led growth. Top-line adjusted for fiscal incentive adjustment was in line with our expectations. Operating profit and net earnings grew 20% and 26% YoY, respectively. This was the fifth consecutive quarter of more than 20% growth in EBITDA for HUVR. Domestic consumer growth of 12% was well ahead of 9% market growth. Volume growth adjusted for base saw a 100bps improvement as compared to previous quarter despite challenges of long truckers strike and unprecedented floods in Kerala. The growth was broad-based wherein all the categories continued their double-digit growth, despite lack of a favourable base till the last quarter. We believe that this is a function of stable demand trend, rural growth surpassing urban growth, HUVR s own initiatives and its investment in market development activities and also consistent innovation well ahead of peers. HUVR s strong focus on cost optimization and moderate competitive intensity helped the company in boosting operating margins by 160bps YoY despite a 200bps QoQ expansion in material costs. A calibrated pricing approach and improved rural trends in our opinion should help HUVR in maintaining high single digit volume growth in 2HFY19 and FY20 despite a not so favourable base. Its constant thrust on innovation, savings programme and premiumisation would support margin expansion. Taking cognisance of the inflationary environment after the sharp rise in crude oil prices and depreciation of the INR, we have revised our estimates downwards. We believe that considering the improvement in organisational capabilities through investment in customer development and supply chain, HUVR s ability to outperform in this volatile, Uncertain, Complex and Ambiguous (VUCA) world remains strong. Therefore, we continue to retain our Buy rating on HUVR with a revised target price of Rs.1,900 (from Rs.2,025 earlier) indicating an upside of 21% from CMP. The revision in target price factors in rolling forward the valuation to September 2020E earnings, reduction in earnings estimates by 2%-5%(FY19E and FY20E) and revised target PE multiple of 50x (from 55x earlier) to reflect the increased macro risks. Broad-based growth: HUVR has again delivered a strong double-digit volume-led growth in 2QFY18. Domestic consumer growth of 12% was supported by a 10% growth in volume across categories. All the categories grew in double digits, despite lack of a favourable base till the last quarter. There were many new product launches/campaigns (see Exhibit 7) during the quarter across categories. Robust operating profit growth continues: Strong focus on cost savings and efficiency along with a healthy growth trajectory of premium portfolio helped HUVR to report robust operating earnings growth despite crude oil price-related pressure. We believe that its constant thrust on innovation, savings programme and premiumisation would continue to support margin expansion. Outlook and valuation: We believe that considering the improvement in organisational capabilities through investment in customer development and supply chain, HUVR s ability to outperform in this VUCA world remains strong and it will continue to trade at a premium valuation compared to peers. We have retained Buy rating, after revising our estimates and rolling forward the valuation to Sept 2020E earnings, with a revised target price of Rs1,900 and target PE of 50x, indicating an upside of 21%. BUY Sector: FMCG CMP: Rs1,570 Target Price: Rs1,900 Upside: 21% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com +91-22-6273 8064 Abhishek Navalgund Junior Research Analyst abhishek.navalgund@nirmalbang.com +91-22-6273 8013 Key Data Current Shares O/S (mn) 2,164.6 Mkt Cap (Rsbn/US$bn) 3,397.6/46.2 52 Wk H / L (Rs) 1,809/1,216 Daily Vol. (3M NSE Avg.) 1,697,505 Price Performance (%) 1 M 6 M 1 Yr Hindustan Unilever (3.5) 11.1 26.5 Nifty Index (7.9) 0.1 3.7 Source: Bloomberg Y/E March (Rsmn) 2QFY18 1QFY19 2QFY19 YoY (%) QoQ (%) 1HFY18 1HFY19 YoY (%) Net sales 83,090 94,870 92,340 11.1 (2.7) 1,68,380 1,87,210 11.2 COGS 39,290 43,640 44,350 12.9 1.6 80,130 87,990 9.8 Gross margin % 52.7 54.0 52.0 (70bps) (200bps) 52.4 53.0 60bps Employee costs 4,350 4,420 4,380 0.7 (0.9) 8,540 8,800 3.0 % of sales 5.2 4.7 4.7 (50bps) 10bps 5.1 4.7 (40bps) Advertising costs 10,230 11,530 11,060 8.1 (4.1) 19,280 22,590 17.2 % of sales 12.3 12.2 12.0 (30bps) (20bps) 11.5 12.1 60bps Other expenses 12,400 12,770 12,360 (0.3) (3.2) 24,950 25,130 0.7 % of sales 14.9 13.5 13.4 (150bps) (10bps) 14.8 13.4 (140bps) EBITDA 16,820 22,510 20,190 20.0 (10.3) 35,480 42,700 20.3 EBITDA margin % 20.2 23.7 21.9 160bps (190bps) 21.1 22.8 170bps Depreciation 1,150 1,270 1,300 13.0 2.4 2,290 2,570 12.2 EBIT 15,670 21,240 18,890 20.5 (11.1) 33,190 40,130 20.9 EBIT margin % 18.9 22.4 20.5 160bps (190bps) 19.7 21.4 170bps Interest expenses 60 70 70 16.7 0.0 120 140 16.7 Other income 2,040 1,350 3,050 49.5 125.9 3,170 4,400 38.8 Exceptional items 360 (590) (350) (197.2) (40.7) 230 (940) (508.7) PBT 18,010 21,930 21,520 19.5 (1.9) 36,470 43,450 19.1 Tax 5,250 6,640 6,270 19.4 (5.6) 10,880 12,910 18.7 Effective tax rate % 29 30 29 - (110bps) 30 30 (10bps) Adjusted PAT 12,400 15,880 15,600 25.8 (1.8) 25,360 31,480 24.1 Adj. PAT margin % 14.6 16.5 16.4 180bps (10bps) 14.8 16.4 160bps EPS 5.7 7.3 7.2 25.8 (1.8) 11.7 14.5 24.1
Exhibit 1: Financial summary Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net sales 3,18,899 3,45,250 3,88,272 4,32,868 4,76,666 YoY growth (%) 2.7 8.3 12.5 11.5 10.1 EBITDA 60,470 72,760 88,001 1,03,615 1,20,533 EBITDA margin (%) 19.0 21.1 22.7 23.9 25.3 PAT 44,904 52,360 62,078 75,296 87,342 EPS 19.6 24.5 29.1 34.8 40.4 YoY change (%) 2.7 24.7 18.9 19.5 16.0 RoCE (%) 88.5 100.2 114.9 134.6 160.1 RoE (%) 70.3 77.2 86.1 103.3 122.0 P/E (x) 46.4 66.9 53.9 45.1 38.9 P/BV (x) 30.4 50.1 46.2 47.0 47.9 EV/EBITDA (x) 31.7 47.7 37.8 32.0 27.4 Exhibit 2: Our estimates versus actual performance Y/E (Rsmn) 2QFY18 1QFY19 2QFY19 YoY (%) QoQ (%) NBIE estimate Variation (%) Net sales 83,090 94,870 92,340 11.1 (2.7) 93,655 (1.4) EBITDA 16,820 22,510 20,190 20.0 (10.3) 19,668 2.7 EBITDA (%) 20.2 23.7 21.9 160bps (190bps) 21.0 90bps Adj PAT 12,400 15,880 15,600 25.8 (1.8) 13,883 12.4 Exhibit 3: Change in our estimates Y/E March Old estimates New estimates Change (%) (Rsmn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Net sales 3,91,074 4,45,840-3,88,272 4,32,868 4,76,666 (0.7) (2.9) N.A. EBITDA 89,719 1,09,853-88,001 1,03,615 1,20,533 (1.9) (5.7) N.A. EBITDA (%) 22.9 24.6-22.7 23.9 25.3 (0.2) (0.7) N.A. Net income 63,543 79,707-62,078 75,296 87,342 (2.3) (5.5) N.A. 2 Hindustan Unilever
Exhibit 4: Category-wise performance Segment-wise results 2QFY18 1QFY19 2QFY19 YoY (%) QoQ (%) 1HFY18 1HFY19 YoY (%) Segment-wise revenues (Rsmn) 83,030 94,870 92,340 11.2 (2.7) 1,75,160 1,87,210 6.9 - Home care 27,390 31,460 30,800 12.4 (2.1) 57,860 62,260 7.6 - Beauty & personal care 39,100 44,070 43,160 10.4 (2.1) 82,780 87,230 5.4 - Foods solutions business 15,040 17,850 17,040 13.3 (4.5) 31,340 34,890 11.3 Others 1,500 1,490 1,340 (10.7) (10.1) 3,180 2,830 (11.0) Sales proportion (%) - Home care 33.0 33.2 33.4 40bps 20bps 33.0 33.3 20bps - Beauty & personal care 47.1 46.5 46.7 (40bps) 30bps 47.3 46.6 (70bps) - Foods solutions business 18.1 18.8 18.5 30bps (40bps) 17.9 18.6 70bps Others 1.8 1.6 1.5 (40bps) (10bps) 1.8 1.5 (30bps) Segment-wise results (Rsmn) 15,560 20,960 18,970 21.9 (9.5) 33,730 39,930 18.4 - Home care 3,830 6,020 4,920 28.5 (18.3) 8,310 10,940 31.6 - Beauty & personal care 9,480 11,620 11,150 17.6 (4.0) 20,270 22,770 12.3 - Foods solutions business 2,310 3,340 2,880 24.7 (13.8) 5,270 6,220 18.0 Others (60) (20) 20 (133.3) (200) (120) - (100.0) EBIT margin (%) - Home care 14.0 19.1 16.0 200bps (320bps) 14.4 17.6 320bps - Beauty & personal care 24.2 26.4 25.8 160bps (50bps) 24.5 26.1 160bps - Foods solutions business 15.4 18.7 16.9 150bps (180bps) 16.8 17.8 100bps Others (4.0) (1.3) 1.5 550bps 280bps (3.8) 0.0 380bps EBIT composition (%) - Home care 24.6 28.7 25.9 130bps (280bps) 24.6 27.4 280bps - Beauty & personal care 60.9 55.4 58.8 (210bps) 330bps) 60.1 57.0 (310bps) - Foods solutions business 14.8 15.9 15.2 30bps (80bps) 15.6 15.6 - Others (0.4) (0.1) 0.1 50bps 20bps (0.4) - 40bps Note: The above numbers are reported numbers. Following the change in accounting treatment, numbers in 1HFY18 column are not comparable Exhibit 5: Comparable sales growth category-wise Segments (%) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 Home care 13 20 21 20 13 Beauty & personal care 8 17 13 14 11 Refreshment 10 13 14 Foods 11 18 10 14 12 Total 10 17 16 16 11 3 Hindustan Unilever
Conference-call highlights HUVR reported 11% sales growth led by a strong volume growth of 10% in 1QFY19. The growth was broad-based as all categories grew in double digits. This was similar to the previous quarter. The management indicated that rural growth surpassed urban growth. Also, it stated that demand outlook is stable. We believe the improved rural trajectory will boost volume growth in the coming quarters. Exhibit 6: Rural growth inching ahead of urban markets Source: Company presentation, Nirmal Bang Institutional Equities Research Strong volume-driven growth in home care was sustained wherein the fabric wash category grew in double digits led by premiumisation and market develeopment. Household care category also witnessed a strong volume growth. Personal care category also reported robust growth. Personal wash category grew on the back of strong growth in the premium portfolio namely, Dove and Pears soaps and also HUVR launched Lifebuoy at Rs5 price point to step up penetration in select markets. All other personal product segments continued their strong growth momentum on the back of ongoing innovation and market development activities. Food solution portfolio growth was led by strong performance of beverage portfolio and new activations etc. Exhibit 7: New product launches/campaigns during the quarter Category Brand Description Home care Domex Pick up the brush campaign in south India. Beauty and personal care Lifebuoy Penetration step-up Rs5 access pack launched in select markets. Beauty and personal care Fair & Lovely Relaunch of Men s Fair & Lovely Beauty and personal care TRESemme Relaunch with superior fragrance and packaging. Beauty and personal care Lakme Exclusive make up range launch Kareena Kapoor Khan by Lakme Absolute Food solution business Adityaa Acquired Adityaa Milk Ice cream. Source: Company presentation, Nirmal Bang Institutional Equities Research Performance of the naturals portfolio tracked internal expectations and is set to grow 2.5x the company average growth rate. Performance of Lever Ayush range and Indu Lekha has been satisfactory. Ayush is tracking expectations in south India market. The management is committed to invest in Ayush brand which will further strengthen its presence in the naturals market in other regions. 4 Hindustan Unilever
Exhibit 8: Strong profile of naturals across categories Source: Company presentation, Nirmal Bang Institutional Equities Research Operating margin during the quarter was up 160bps YoY, despite input price-related pressure. Segmentwise, all the divisions reported margin improvement led by healthy growth trend, premiumisation and strong product initiatives of HUVR. The management indicated that considering the crude oil prices and overall depreciation in the currency, pricing will come into play in 2HFY19 to mitigate its impact. Also, we believe the overall strategy to re-image HUVR by investing on customer development and market development activities will support margin expansion. In the quarter gone by also, the speed and agility across the value chain has served well the company and that gives it an edge over peers, in our opinion. Exhibit 9: Speed and agility across the value chain Source: Company presentation, Nirmal Bang Institutional Equities Research The management indicated that HUVR witnessed competitive pressure easing during the quarter. Also, considering the cost pressure, other consumer companies are not investing enough on market development and advertising. This will help HUVR to build its market share further. Also, in modern trade, the competitive pressure it witnessed a year ago was much higher compared to the current scenario. Acquisition of Adityaa Milk Ice Cream was completed in the last week of September 2018 and hence its impact on the performance was negligible, but the management sounded extremely optimistic on ice cream and frozen dessert space. 5 Hindustan Unilever
Exhibit 10: Expansion of ice-cream portfolio Source: Company presentation, Nirmal Bang Institutional Equities Research There has been one change in the accounting treatment. Fiscal incentives received for the factories located in specific areas have been reported under other income as against other operating income in the past. This will lower the revenue and EBITDA numbers. Adjusted for that, the revenues were broadly in line with our expectation. HUVR has appointed Mr. Leo Puri as an independent director who has an experience in global firms like McKinsey and Co, A.T. Kearney etc. Also, the HUVR board has recommended an interim dividend of Rs9 per share as against Rs8 per share in the same period last year. 6 Hindustan Unilever
2QFY17 2QFY17 2QFY17 3QFY17 3QFY17 3QFY17 4QFY17 4QFY17 4QFY17 1QFY18 1QFY18 1QFY18 2QFY18 2QFY18 2QFY18 3QFY18 3QFY18 3QFY18 4QFY18 4QFY18 4QFY18 1QFY19 1QFY19 1QFY19 2QFY19 2QFY19 2QFY19 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 2QFY17 2QFY17 3QFY17 3QFY17 Institutional Equities 4QFY17 4QFY17 1QFY18 1QFY18 2QFY18 2QFY18 3QFY18 3QFY18 4QFY18 4QFY18 1QFY19 1QFY19 2QFY19 2QFY19 Exhibit 11: Robust volume growth continues (%) 14 12.0 12 11.0 11.0 10 8 6 4.0 4.0 4 2 0.0 0 (1.0) (2) (4) (6) (4.0) 10.0 Exhibit 12: Improved top-line performance (reported) (Rsmn) (%) 100,000 10.8 11.2 14 11.5 11.1 90,000 12 80,000 70,000 10 60,000 6.4 8 4.9 1.4 5.9 50,000 6 40,000 (1.0) 4 30,000 20,000 2 10,000 0 - -2 Net Sales (Rs mn) Sales growth (%) Exhibit 13: Strong operating profit trend Exhibit14: Net income trending upwards (Rsmn) (%) 24,000 14.1 23.9 24.0 20.6 30 22,000 19.7 20.0 25 20,000 12.3 20 18,000 15 16,000 5.1-5.2 10 5 14,000 0 12,000 (5) 10,000 (10) (Rsmn) 27.8 (%) 16,000 25.8 26 15,000 22.5 14,000 16.5 19.6 21 13,000 16 9.3 12,000 11.5 11,000 6.8 6.2 11 10,000 6 EBITDA (Rs mn) EBITDA growth % PAT (Rs mn) PAT Growth % Exhibit 15: Improved margin profile (Rsmn) (%) 23.7 24 16.5 16.0 23 22.5 16 21.9 21.9 22 15.9 15.5 15 15.2 21 20.1 15 20.2 19.6 20 14.8 14.5 14.7 19 14.3 14 17.9 17.6 18 13.5 13.5 17 13.3 13 Exhibit 16: One-year forward P/E (x) 60 55 50 45 40 35 30 25 EBITDA margin % PAT margin % (RHS) 1 yr Fwd PE 5 yr Median PE +1 SD -1 SD 7 Hindustan Unilever
Financials (standalone) Exhibit 17: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net sales 3,18,899 3,45,250 3,88,272 4,32,868 4,76,666 % Growth 2.7 8.3 12.5 11.5 10.1 COGS 1,56,842 1,62,320 1,82,033 2,00,818 2,19,468 Staff costs 16,198 17,450 18,250 19,699 21,692 Advertising costs 34,693 41,050 47,290 52,474 55,537 Other expenses 50,697 51,670 52,699 56,262 59,435 Total expenses 2,58,429 2,72,490 3,00,271 3,29,253 3,56,133 EBITDA 60,470 72,760 88,001 1,03,615 1,20,533 % growth 5.2 20.3 20.9 17.7 16.3 EBITDA margin (%) 19.0 21.1 22.7 23.9 25.3 Other income 5,259 5,690 6,352 7,434 7,737 Interest costs 215 210 240 220 220 Depreciation 3,960 4,780 5,119 5,519 5,894 Profit before tax (before exceptional items) 61,554 73,460 88,994 1,05,310 1,22,156 Exceptional items 2,411 (620) (940) 0 0 Tax 19,060 20,480 25,976 30,013 34,814 PAT (before exceptional items) 42,494 52,980 63,018 75,296 87,342 PAT 44,904 52,360 62,078 75,296 87,342 PAT margin (%) 13.9 14.9 15.7 17.1 18.0 % Growth 8.6 16.6 18.6 21.3 16.0 Exhibit 19: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Share capital 2,164 2,164 2,164 2,164 2,164 Reserves 62,740 68,590 71,321 70,136 68,760 Net worth 64,904 70,754 73,485 72,299 70,924 Total debt - - - - - Deferred tax liability (1,600) (2,550) (2,550) (2,550) (2,550) Total liabilities 73,894 82,584 85,690 86,198 86,487 Gross block 43,190 49,190 53,190 57,190 60,690 Depreciation 6,650 11,430 16,549 22,068 27,962 Net block 36,540 37,760 36,641 35,122 32,728 Capital work-in-progress 5,730 7,960 7,500 7,000 6,500 Investments 2,600 2,560 3,106 3,463 3,337 Inventories 23,620 23,590 28,277 27,842 32,286 Debtors 9,280 11,470 11,933 11,786 14,333 Cash 19,770 42,024 39,170 42,481 46,037 Loans & advances 3,580 4,100 4,659 5,194 4,290 Other current assets 5,790 5,760 5,824 5,627 5,720 Total current assets 93,654 1,11,394 1,18,207 1,26,695 1,41,276 Creditors 60,060 70,130 71,951 75,498 83,240 Other current liabilities & provisions 11,960 16,230 17,472 20,778 22,403 Total current liabilities 72,020 86,360 89,424 96,276 1,05,644 Net current assets 21,634 25,034 28,783 30,419 35,632 Total assets 73,894 82,584 85,690 86,198 86,487 Exhibit 18: Cash flow Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E PAT 44,904 52,360 62,078 75,296 87,342 Depreciation 3,960 4,780 5,119 5,519 5,894 Other income (5,259) (5,690) (6,352) (7,434) (7,737) (Inc.)/dec. in working capital 7,600 12,210 (2,150) 7,630 2,284 Cash flow from operations 56,464 69,350 65,047 88,446 95,520 Capital expenditure (-) (13,230) (8,230) (3,540) (3,500) (3,000) Net cash after capex 43,234 61,120 61,507 84,946 92,520 Interest paid (-) - - - - - Dividends paid (-) (42,929) (51,446) (59,346) (76,482) (88,717) Inc./(dec.) in total borrowings - - - - - Inc./(dec.) in investments (9,990) 6,684 (4,999) (6,312) (3,816) Cash from financial activities (42,149) (48,606) (58,972) (74,788) (87,053) Others 1,400 - - - - Opening cash balance 30,120 19,770 42,024 39,170 42,481 Closing cash balance 19,770 42,024 39,170 42,481 46,037 Exhibit 20: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Per share (Rs) EPS 19.6 24.5 29.1 34.8 40.4 Book value 30.0 32.7 34.0 33.4 32.8 DPS 16.6 20.0 23.0 29.6 34.3 Valuation (x) P/Sales 5.7 10.1 8.7 7.8 7.1 EV/sales 5.6 9.9 8.6 7.7 6.9 EV/EBITDA 31.7 47.7 37.8 32.0 27.4 P/E 46.4 66.9 53.9 45.1 38.9 P/BV 30.4 50.1 46.2 47.0 47.9 Return ratios (%) RoCE 88.5 100.2 114.9 134.6 160.1 RoE 70.3 77.2 86.1 103.3 122.0 Profitability ratios (%) Gross margin 50.8 53.0 53.1 53.6 54.0 EBITDA margin 19.0 21.1 22.7 23.9 25.3 EBIT margin 17.7 19.7 21.3 22.7 24.1 PAT margin 13.9 14.9 15.7 17.1 18.0 Liquidity ratios (x) Current ratio 1.3 1.3 1.3 1.3 1.3 Quick ratio 1.0 1.0 1.0 1.0 1.0 Solvency ratio (x) Debt to equity ratio - - - - - Turnover ratios Total asset turnover ratio (x) 2.4 2.1 2.2 2.4 2.5 Fixed asset turnover ratio (x) 8.2 7.7 8.8 10.3 12.2 Debtor days 11 11 11 10 10 Inventory days 57 53 52 51 50 Creditor days 128 129 132 134 132 8 Hindustan Unilever
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 Aug-18 Sep-18 Oct-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 29 September 2017 Buy 1,170 1,425 26 October 2017 Buy 1,272 1,460 20 December 2017 Buy 1,350 1,570 18 January 2018 Buy 1,371 1,700 15 May 2018 Buy 1,503 1,750 17 July 2018 Buy 1,751 2,025 15 October 2018 Buy 1,570 1,900 Rating chart 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 Not Covered Covered 9 Hindustan Unilever
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