Company Update Institutional Equities Hindustan Unilever Reuters: HLL.BO; Bloomberg: HUVR IN Faster And Stronger We reiterate our positive view on the Home and Personal Care (HPC) space and continue to highlight Hindustan Unilever (HUL) as our Top Buy idea. Goods and Services Tax or GST windfall underpriced: GST Council s decision to reduce the tax rate on premium consumer goods by 1% (from 28% to 18%) was a significant windfall for the sector. In our opinion, GST rate cut is underpriced and we believe it could easily uplift HPC segment s long-term growth rate by 2%-3% supported by improved market penetration, higher per capita consumption and premiumisation. HUL has an edge over competition because around 4% of its portfolio was under the 28% tax bracket, higher than its peers (except Gillette India which caters to a different segment). HUL was proactive in reducing prices and has gone for price cuts ranging from 7%-24% in product categories such as hair care, skin care, foods and detergents and also increased grammage in case of massmarket detergent brands (See Exhibit 1). Margin-accretive innovation: HUL continues to strengthen its innovation agenda in mid-to-premium brands like Lifebuoy, Surf, Dove, etc. It is also focusing on smaller but potentially large segments like air purifier. To increase its digital presence, HUL recently launched a mobile application called Skin Advisor Live (S.A.L.) which helps women transform their approach to skin care by giving them informative advice and solutions. All these activities are expected to create brand awareness and expand its reach and ultimately lead to margin expansion. Global strategy further to aid the impetus: Unilever PLC has indentified Naturals as a key focus area which is also reflected in its recent buyout of Schmidt Naturals and Sundial Brands. Some of these brands could have a salience for India in future. Unilever PLC is focusing on growth of core brands, streamlining the supply chain, and cost savings by adopting measures like Zero Based Budgeting (ZBB) leading to operating margin expansion. We believe the benefits of these measures could flow through its Indian operations as well. Valuation and outlook: We expect HUL to deliver competitive top-line and profitability growth and further higher rural focus in 218 could support this growth impetus. Therefore we have retained Buy rating on HUL with a revised target price of Rs1,57 by September 218, implying an upside of 16% from the CMP. We have marginally increased our earnings estimates by 1.3% and 5.4% in FY19 and FY2 respectively and also revised our earnings multiple (5x) to factor in improved market conditions and growth rates going forward. 2 December 217 BUY Sector: FMCG CMP: Rs1,35 Target Price: Rs1,57 Upside: 16% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com +91-22-3926 864 Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com +91-22-3926 813 Key Data Current Shares O/S (mn) 2,164.5 Mkt Cap (Rsbn/US$bn) 2,921.4/45.6 52 Wk H / L (Rs) 1,352/782 Daily Vol. (3M NSE Avg.) 1,226,327 One -Year Indexed Stock Performance 16 15 14 13 12 11 1 9 8 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Price Performance (%) HINDUSTAN UNILEVER Nifty 5 1 M 6 M 1 Yr Hindustan Unilever 5.6 23.2 66.7 Nifty Index 1.7 8.3 29.1 Source: Bloomberg
Exhibit 1: Price cut by HUL post reduction in GST rate from 28% to 18% Category Brand SKU Old price New price % reduction Detergents Active Wheel 1 Kg 52 48 8% Detergents Surf Excel Matic 1 ltr 245 199 19% Detergents Surf Excel Matic 5g 13 99 24% Detergents Rin 125g 1 1 12% extra Detergents Vim 8g 5 5 12% extra Foods Knorr 68g 15 12 2% Shampoo Sunsilk 34ml 24 165 19% Skin care Lakme 9g 15 14 7% Skin care Lakme 4.3g 28 25 11% Skin care Fair and Lovely facewash 2g 25 2 2% Skin care Ponds skin cream 23g 79 64 19% Refreshments Bru 5g 145 111 23% Exhibit 2 : Newspaper advertisements indicating price cuts and promotions Source: Times of India, Nirmal Bang Institutional Equities Research 2 Hindustan Unilever
Exhibit 3: Recent advertisement campaigns and new launches Brand Dove Lifebuoy Surf Excel Pureit Advertisement campaign/launch New nourishing hand wash launched. Yound girl empowerment campaign (hand wash). Kickstart #HaarkoHarao campaign Advertisement commercial promoting Pureit air purifier. Domex Kissan Ponds Ponds Introduced toilet cleaning powder at an affordable price point to promote sanitation. Real Togetherness campaign. New advertisement campaign Jhappi.(cold cream). Launch of mobile app Skin Advisor Live. Source: Nirmal Bang Institutional Equities Research Focus on naturals segment at parent level The Naturals trend is evolving all over the world and Unilever PLC was proactive while foraying into this segment. Its core strategy involves expanding presence in naturals category and the same was reflected from its recent buyout of Schmidt Naturals and Sundial brands. Some of these brands could have salience for India in future. The company is introducing naturals across categories i.e. personal care and home care. Data indicates that currently naturals account for 27% of global personal care sales and Unilever PLC is already growing well ahead of the market. Core focus on naturals portfolio at the parent level gives an edge to HUL over local players and there could be a similar growth rate in Indian market which is currently dominated by Patanjali. Exhibit 4: Naturals segment of Unilever PLC outpacing the market Source: Unilever PLC presentation, Nirmal Bang Institutional Equities Research 3 Hindustan Unilever
Exhibit 5: Focus on naturals in personal care strategy of Unilever PLC Source: Unilever PLC presentation, Nirmal Bang Institutional Equities Research Exhibit 6: Key thrust in home care strategy of Unilever PLC Exhibit 7: Latest acquisition by Unilever PLC in naturals space Source: Unilever PLC presentation, Nirmal Bang Institutional Equities Research Source: Unilever PLC presentation, Nirmal Bang Institutional Equities Research Exhibit 9: Peer Comparison Company Exhibit 8: Change in our estimates Y/E March Old estimate New estimate Change (%) (Rsmn) FY18E FY19E FY2E FY18E FY19E FY2E FY18E FY19E FY2E Net sales 3,4,289 3,64,326 3,92,79 3,4,289 3,68,611 4,4,848-1.2 3.1 EBITDA 72,451 84,942 95,312 72,451 85,946 1,,287-1.2 5.2 EBITDA (%) 21.3 23.3 24.3 21.3 23.3 24.8 - - 5bps PAT 52,576 61,73 69,414 52,576 62,55 73,139-1.3 5.4 Source: Bloomberg, Nirmal Bang Institutional Equities Research CMP Target price Mkt cap (USD mn) P/Sales (x) EV/EBITDA (x) P/E (x) Sales CAGR FY18E FY19E FY2E FY18E FY19E FY2E FY18E FY19E FY2E %* EBITDA CAGR %* EPS CAGR %* Hindustan Unilever Ltd. 1,35 1,57 45,623 8.1 7.5 6.8 39.6 33.3 28.5 55.6 46.7 39.9 8.3 18.3 17.6 Godrej Consumer Products Ltd. 991 N.R. 1,541 6.6 5.8 5.1 32.7 28.2 24.7 46. 38.9 33.2 12.4 13.7 16.1 Dabur India Ltd. 35 318 9,63 7.7 7.1 6.6 37.7 34.4 31. 45.4 41.3 37.5 6.6 8.7 8.7 Marico Ltd 313 N.R. 6,314 6.2 5.4 4.8 32.6 27.6 23.8 46.6 39.3 33.7 12.9 12.6 16.2 Procter & Gamble Hygiene & Healthcare 9,423 N.R. 4,777 12.3 1.6 9. 4.1 34.2 29. 62.2 53.3 45. 13.5 15.9 15.6 Emami India Ltd. 1,35 1,8 4,627 1.9 9.9 9. 37. 32.9 29. 44.4 4.6 36.8 9.8 8.6 1.2 Colgate Palmolive (India) Ltd 1,74 1,1 4,563 7. 6.7 6.2 28.2 27. 24.6 45.5 44. 4. 5.5 6.9 4.4 Gillette India Ltd 6,873 7, 3,498 12.1 11. 9.7 49.2 44.6 37.4 72.1 66.3 54.3 1. 15.4 17.6 Jyothy Laboratories Limited 394 N.R. 1,117 4.1 3.6 3.1 27.1 23.1 19.4 4.2 34.8 29.1 11.3 13.1 5.8 Source: Bloomberg, Nirmal Bang Institutional Equities Research *3yearCAGR FY17-FY2E 4 Hindustan Unilever
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Institutional Equities Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Exhibit 1: Quarterly underlying volume trend (%) 5 4. 4. 4. 4 3 2 1 (1.). (1) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 (2) (3) (4) (5) (4.) Exhibit 12: Robust EBITDA growth likely (Rsmn) (%) 1,2, 21.6 25 19.8 1,, 18.6 16.4 16.7 2 8, 15 11.8 6, 1.4 1 4, 5.2 2, 5 - FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E EBITDA EBITDA Growth Exhibit 14: Return ratios inching upwards (Rsmn) (%) 8, 16 136.9 7, 14 117.8 6, 12.2 12 5, 88.5 1 87.4 15.4 4, 59.2 6.7 91.1 8 59.4 79.6 3, 66.6 7.3 6 59.8 2, 56.2 52.3 4 1, 2 - FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Capital Employed RoCE RoE Exhibit 11: Improved top-line performance likely (Rsmn) (%) 4,5, 16.7 18 4,, 16 3,5, 14 3,, 9.9 9.8 12 2,5, 8.6 8.3 1 2,, 6.7 8 1,5, 6 1,,.8 2.7 4 5, 2 - FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Sales Sales growth Exhibit 13: Margin profile to witness significant improvement (Rsmn) (%) 8, 3 24.8 7, 23.3 25 21.3 6, 18.5 19. 15.5 16. 16.9 2 5, 4, 17.8 16.7 15 14.4 15.2 3, 13.6 13.8 13.1 13.9 1 2, 1, 5 - FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Net Profit PAT margin EBITDA margin Exhibit 15: One-year forward P/E (x) 55 5 45 4 35 3 25 2 15 Forward PE Median 5 Hindustan Unilever
Financials (standalone) Exhibit 16: Income statement Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY2E Net Sales 3,1,61 3,18,899 3,4,289 3,68,611 4,4,848 % Growth.8 2.7 6.7 8.3 9.8 COGS 1,53,53 1,56,842 1,6,836 1,7,575 1,83,484 Staff costs 15,728 16,198 16,792 18,62 19,433 Advertising costs 36, 34,693 37,755 38,254 43,15 Other expenses 48,338 5,697 52,455 55,774 58,629 Total expenses 2,53,118 2,58,429 2,67,838 2,82,665 3,4,561 EBITDA 57,491 6,47 72,451 85,946 1,,287 % growth 1.4 5.2 19.8 18.6 16.7 EBITDA margin (%) 18.5 19. 21.3 23.3 24.8 Other income 5,638 5,259 5,45 5,979 6,565 Interest costs 153 215 12 - - Depreciation 3,28 3,96 4,943 5,112 5,269 PBT (before exceptional items) 59,769 61,554 72,793 86,812 1,1,582 Exceptional items (38) 2,411 23 - - Tax 18,96 19,6 2,446 24,37 28,443 PAT (before exceptional items) 41,673 42,494 52,346 62,55 73,139 PAT 41,365 44,94 52,576 62,55 73,139 PAT margin (%) 13.1 13.9 15.2 16.7 17.8 % Growth (4.6) 8.6 17.1 18.9 17. Exhibit 18: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY2E Share capital 2,164 2,164 2,164 2,164 2,164 Reserves 6,63 62,74 65,53 67,84 66,652 Net worth 62,794 64,94 67,217 69,967 68,816 Total debt Deferred tax liability (1,68) (1,6) (1,6) (1,6) (1,6) Total liabilities 71,4 73,894 74,646 78,148 77,913 Gross block 31,95 43,19 46,69 5,69 54,69 Depreciation 2,93 6,65 11,593 16,76 21,975 Net block 29,2 36,54 35,97 33,984 32,715 Capital work-in-progress 3,98 5,73 7,5 7,5 7, Investments 3,19 2,6 7,223 7,824 8,558 Inventories 25,28 23,62 23,97 25,567 25,78 Debtors 1,64 9,28 8,531 1,762 1,341 Cash 3,12 19,77 22,949 28,174 24,952 Loans & advances 2,94 3,12 3,25 3,521 3,851 Other current assets 4,87 6,25 5,417 5,868 8,558 Total current assets 95,524 94,114 91,565 1,3,624 1,8,72 Creditors 54,98 6,6 59,543 61,963 68,738 Other current liabilities & provisions 11,54 11,96 14,446 2,343 17,545 Total current liabilities 66,52 72,2 73,989 82,35 86,283 Net current assets 29,4 22,94 17,576 21,319 21,789 Total assets 71,4 73,894 74,646 78,148 77,913 Exhibit 17: Cash flow Y/E March (Rsmn) FY16 FY17 FY18E FY19E FY2E PAT 41,365 44,94 52,576 62,55 73,139 Depreciation 3,28 3,96 4,943 5,112 5,269 Other income (5,638) (5,259) (5,45) (5,979) (6,565) (Inc.)/dec. in working capital (786) 7,14 3,22 4,37 1,567 Cash flow from operations 43,787 56,4 6,721 71,654 79,976 Capital expenditure (-) (6,622) (13,23) (5,27) (4,) (3,5) Net cash after capex 37,165 42,774 55,451 67,654 76,476 Interest paid (-) - - - - - Dividends paid (-) (41,395) (42,929) (5,263) (59,755) (74,291) Inc./(dec.) in total borrowings - - - - - Inc./(dec.) in investments 2,476 (9,99) (128) (3,155) (5,994) Cash from financial activities (39,315) (42,149) (51,824) (59,3) (73,374) Others - 1,4 - - - Opening cash balance 28,61 3,12 19,77 22,949 28,174 Closing cash balance 3,12 19,77 22,949 28,174 24,952 Exhibit 19: Key ratios Y/E March FY16 FY17 FY18E FY19E FY2E Per share (Rs) EPS 19.1 2.8 24.3 28.9 33.8 Book value 29. 3. 31.1 32.3 31.8 DPS 16. 16.6 19.4 23.1 28.7 Valuation (x) P/Sales 5.6 5.7 8.1 7.5 6.8 EV/sales 5.5 5.6 7.9 7.3 6.7 EV/EBITDA 31.8 31.7 39.6 33.3 28.5 P/E 45.5 43.9 55.6 46.7 39.9 P/BV 3. 3.4 43.5 41.8 42.5 Return ratios (%) RoCE 87.4 88.5 12.2 117.8 136.9 RoE 66.6 7.3 79.6 91.1 15.4 Profitability ratios (%) Gross margin 5.7 5.8 52.7 53.7 54.7 EBITDA margin 18.5 19. 21.3 23.3 24.8 EBIT margin 17.5 17.7 19.8 21.9 23.5 PAT margin 13.1 13.9 15.2 16.7 17.8 Liquidity ratios (%) Current ratio 1.4 1.3 1.2 1.3 1.3 Quick ratio 1.1 1..9.9 1. Solvency ratio (%) Debt-to-equity ratio - - - - - Turnover ratios Total asset turnover ratio (x) 2.4 2.4 2.4 2.4 2.6 Fixed asset turnover ratio (x) 1.1 8.2 8.5 9.4 1.8 Debtor days 1 11 9 9 9 Inventory days 61 57 54 53 51 Creditor days 129 128 13 13 13 6 Hindustan Unilever
Apr-17 Apr-17 May-17 May-17 May-17 Jun-17 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Sep-17 Oct-17 Oct-17 Oct-17 Nov-17 Nov-17 Dec-17 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 29 September 217 Buy 1,17 1,425 26 October 217 Buy 1,272 1,46 2 December 217 Buy 1,35 1,57 Rating track graph 15 14 13 12 11 1 9 8 7 Not Covered Covered 7 Hindustan Unilever
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