GST pressures dealt well Q2 tops estimates: Net sales, EBITDA and adj. PAT grew 7%, 20% and 19%, vs. consensus expectation of 7%, 14% and 11%. Like to like^ (LTL) domestic consumer revenue grew ~10% on ~4% volume growth. Benign input costs and benefits from cost saving initiatives absorbed effect of step-up in A&P spends (+20% YoY), leading to EBITDA growth at 19% (LTL OPM up 180 bps YoY). Company highlighted while GSTrelated transition affected trade purchases, consumer off-take was stable during the quarter. HUL is the best play on two structural trends -- premiumization and shift to organized due to GST. We expect OPM to increase by 350-400 bps over FY17-20E on multiple margin tailwinds. Maintain BUY with revised TP of Rs 1,400 based on forward P/E of 44x. We justify a higher than usual target P/E given the 19% EPS CAGR over FY17-19E. 31 OCT 2017 Quarterly Update BUY Target Price: Rs 1,400 CMP : Rs 1,274 Potential Upside : 10% MARKET DATA No. of Shares : 2,164 mn Free Float : 33% Market Cap : Rs 2,757 bn 52-week High / Low : Rs 1,287 / Rs 783 Avg. Daily vol. (6mth) : 1.4 mn shares Bloomberg Code : HUVR IB Equity Promoters Holding : 67% FII / DII : 13% / 6% Q2FY18 segment performance (LTL): Home care revenue grew strong 13% aided by robust volume growth. Company highlighted laundry segment posted double digit growth across portfolio. Personal care revenue grew 8% with broad based growth across personal products and personal wash (Dove, Lux and Lifebuoy grew in double digits). On Ayurvedic platform, the company highlighted Indulekha sustained strong momentum (now clinically proven for hair growth) and Lever Ayush got off to a good start after national launch in Q1. Oral care remained an area of concern, where performance remained subdued. GST-led price reduction for existing portfolio and Lever Ayush launch nationally should help in coming quarters. Refreshment and Food revenue grew 10% and 11% YoY. Management view -- Rural to see recovery, RM cost inflation a concern: In near term, company expects gradual improvement in rural demand (driven from good monsoon in water-starved areas, recent minimum support price increase for wheat and government investment plan) and improvement in trade conditions. Raw material prices are likely to inflate further (inflationary crude is an area of concern). Financial summary (Standalone) Sales (Rs mn) 304,990 312,980 342,230 383,077 Adj PAT (Rs mn) 41,680 42,490 51,198 60,182 Con. EPS* (Rs) - - 23.4 27.6 EPS (Rs) 19.3 19.7 23.7 27.8 Change YOY (%) 8.0 1.9 20.5 17.5 P/E (x) 66.0 64.7 53.7 45.7 RoE (%) 67.1 66.6 75.9 82.4 RoCE (%) 99.0 99.3 112.2 120.5 EV/E (x) 47.0 44.7 36.9 31.6 DPS (Rs) 15.5 16.5 18.0 21.0 Source: *Consensus broker estimates, Company, Axis Capital ^ Adjusted for accounting impact of GST Key drivers (%) FY16 FY17 FY18E FY19E Volume growth 5.8% 0.8% 6.0% 8.0% Net Sales growth 4.2% -0.4% 9.3% 11.9% RM cost to sales 50.2% 50.1% 49.0% 49.0% EBITDA margin 18.8% 19.3% 21.4% 22.2% Price performance 200 Sensex Hindustan Unilever 150 100 50 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 01
31 OCT 2017 Quarterly Update Our view As highlighted in our upgrade note Multiple margin tailwinds, we view the margin to benefit from factors like (i) pricing power, (ii) easing in competitive pressure from P&G (price hikes in shampoo and detergents started refer Consumer monthly Oct), (iii) likely GST benefits (shift from unorganized to organized), (iv) premiumization and (v) cost rationalization initiatives. Volume growth should see uptick in H2FY18E. Conference call highlights Price growth in Q2 stood at ~6%. GST-related pass through was 3-4% at an organizational level. On rate reduction Personal care portfolio saw price cuts. The company has reduced prices for body lotion, despite GST rate increase, to drive growth A&P increased 20% YoY to support innovation mainly Lever Ayush launched nationally. Share of television advertisement has come down to ~70% (from 90% few years back). Incremental share is now allocated to digital and mobile Indulekha -- Existing market growth is satisfactory. Penetration is extremely low even in market it was present. Company is looking to drive advertisement through substantial clinically-proven claims Channel contribution -- Online is now 2% of turnover. Modern trade and CSD contribute ~12% and ~7% CSD channel is back to ~85-90% of normal buying pattern Exceptional income includes profit on sale of share of Kimberly-Clark Lever Pvt. Ltd. Worth Rs 460 mn Results update Quarter ended (Rs mn) Sep-17 Sep-16 % Chg Jun-17 % Chg Net sales 81,990 76,970 6.5 84,010 (2.4) Other operating income 1,100 1,450 (24.1) 1,280 (14.1) Total revenue 83,090 78,420 6.0 85,290 (2.6) Raw material cost 39,290 39,620 (0.8) 40,840 (3.8) (% of net sales) 47.9 51.5-355 bps 48.6-69 bps Staff expenditure 4,350 3,960 9.8 4,190 3.8 (% of net sales) 5.3 5.1 16 bps 5.0 32 bps A&P spends 10,230 8,510 20.2 9,050 13.0 (% of net sales) 12.5 11.1 142 bps 10.8 170 bps Other expenses 12,400 12,280 1.0 12,550 (1.2) (% of net sales) 15.1 16.0-83 bps 14.9 19 bps EBITDA 16,820 14,050 19.7 18,660 (9.9) EBITDA margin (%) 20.2 17.9 233 bps 22.2-197 bps Other income 2,040 2,530 (19.4) 1,130 80.5 PBIDT 18,860 16,580 13.8 19,790 (4.7) Depreciation 1,150 950 21.1 1,140 0.9 Interest 60 50 20.0 60 0.0 PBT 17,650 15,580 13.3 18,590 (5.1) Tax 4,730 4,762 (0.7) 5,670 (16.6) Adjusted PAT 12,920 10,818 19.4 12,920 0.0 Extra ordinary income/ (exp.) (160) 135 (218.3) (90) 77.8 Reported PAT 12,760 10,954 16.5 12,830 (0.5) 02
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 31 OCT 2017 Quarterly Update Segmental financials (Rs mn) Gross sales PBIT PBIT margin (%) Q2FY18 Q2FY17 YoY (%) Q2FY18 Q2FY17 YoY (%) Q2FY18 Q2FY17 YoY (bps) Home care 27,390 27,770 (1.4) 3,830 2,800 36.8 14.0 10.1 390 Personal care 39,100 40,280 (2.9) 9,480 9,230 2.7 24.2 22.9 133 Foods 2,820 2,780 1.4 170 140 21.4 6.0 5.0 99 Refreshment 12,220 11,690 4.5 2,140 1,720 24.4 17.5 14.7 280 Others 1,500 2,180 (31.2) (60) 90 (166.7) (4.0) 4.1 (813) Total segment 83,030 84,700 (2.0) 15,560 13,980 11.3 18.7 16.5 223 Net sales growth Volume growth 12 9 6 3 10.6 7.7 7.9 5.3 4.7 3.2 4.4 3.6 1.3 (%) 6.8 6.5 5.2 10 6 2 (%) 5 3 6 6 7 6 4 4 4 0 4 0 (2) (1) (3) (1.2) (6) (4) Valuations 1-year forward P/E trend 50 P/E 10 yr median 40 30 20 10 Source: Bloomberg, Axis Capital 03
Financial summary (Standalone) Profit & loss (Rs mn) Net sales 304,990 312,980 342,230 383,077 Other operating income 5,620 5,920 6,378 6,871 Total operating income 310,610 318,900 348,607 389,949 Cost of goods sold (153,050) (156,850) (167,304) (187,835) Gross profit 157,560 162,050 181,304 202,114 Gross margin (%) 51.7 51.8 53.0 52.8 Total operating expenses (100,070) (101,580) (108,230) (117,165) EBITDA 57,490 60,470 73,073 84,949 EBITDA margin (%) 18.8 19.3 21.4 22.2 Depreciation (3,210) (3,960) (4,170) (4,471) EBIT 54,280 56,510 68,904 80,478 Net interest (150) (220) (150) (125) Other income 5,640 5,260 4,913 5,621 Profit before tax 59,770 61,550 73,667 85,974 Total taxation (18,090) (19,060) (22,468) (25,792) Tax rate (%) 30.3 31.0 30.5 30.0 Profit after tax 41,680 42,490 51,198 60,182 Minorities - - - - Profit/ Loss associate co(s) - - - - Adjusted net profit 41,680 42,490 51,198 60,182 Adj. PAT margin (%) 13.7 13.6 15.0 15.7 Net non-recurring items (310) 2,410 - - Reported net profit 41,370 44,900 51,198 60,182 Balance sheet (Rs mn) Paid-up capital 2,160 2,160 2,161 2,161 Reserves & surplus 60,630 62,740 67,778 74,042 Net worth 62,790 64,900 69,939 76,204 Borrowing - - - - Other non-current liabilities (1,680) (1,600) (1,600) (1,600) Total liabilities 61,110 63,300 68,339 74,604 Gross fixed assets 32,180 47,120 52,120 57,320 Less: Depreciation (3,040) (6,880) (11,050) (15,521) Net fixed assets 29,140 40,240 41,070 41,799 Add: Capital WIP 3,860 2,030 2,030 2,030 Total fixed assets 33,000 42,270 43,100 43,829 Total Investment 27,800 37,790 40,790 43,790 Inventory 25,280 23,620 25,784 29,387 Debtors 10,640 9,280 10,314 11,545 Cash & bank 27,590 16,710 22,904 28,351 Loans & advances 5,470 6,180 6,631 7,430 Current liabilities 76,410 82,610 87,435 96,229 Net current assets 310 (16,760) (15,552) (13,016) Other non-current assets - - - - Total assets 61,110 63,300 68,339 74,604 Cash flow (Rs mn) 31 OCT 2017 Quarterly Update Profit before tax 59,770 61,550 73,667 85,974 Depreciation & Amortisation 3,210 3,960 4,170 4,471 Chg in working capital (1,130) 6,660 4,986 2,911 Cash flow from operations 39,740 49,530 55,441 61,943 Capital expenditure (7,570) (13,670) (5,000) (5,200) Cash flow from investing (720) (7,520) (3,087) (2,579) Equity raised/ (repaid) - - 1 1 Debt raised/ (repaid) - - - - Dividend paid (39,970) (42,540) (46,440) (54,198) Cash flow from financing (40,080) (42,640) (46,160) (53,917) Net chg in cash (1,060) (630) 6,195 5,447 Key ratios OPERATIONAL FDEPS (Rs) 19.3 19.7 23.7 27.8 CEPS (Rs) 20.6 22.6 25.6 29.9 DPS (Rs) 15.5 16.5 18.0 21.0 Dividend payout ratio (%) 81.1 79.5 76.0 75.4 GROWTH Net sales (%) 1.1 2.6 9.3 11.9 EBITDA (%) 10.4 5.2 20.8 16.3 Adj net profit (%) 7.8 1.9 20.5 17.5 FDEPS (%) 8.0 1.9 20.5 17.5 PERFORMANCE RoE (%) 67.1 66.6 75.9 82.4 RoCE (%) 99.0 99.3 112.2 120.5 EFFICIENCY Asset turnover (x) 33.1 27.3 31.5 49.8 Sales/ total assets (x) 2.3 2.2 2.3 2.3 Working capital/ sales (x) (0.1) (0.1) (0.1) (0.1) Receivable days 12.7 10.8 11.0 11.0 Inventory days 36.5 33.4 34.2 35.2 Payable days 79.3 84.8 84.5 85.4 FINANCIAL STABILITY Total debt/ equity (x) - - - - Net debt/ equity (x) (0.8) (0.8) (0.9) (1.0) Current ratio (x) 1.0 0.8 0.8 0.9 Interest cover (x) 361.9 256.9 459.4 643.8 VALUATION PE (x) 66.0 64.7 53.7 45.7 EV/ EBITDA (x) 47.0 44.7 36.9 31.6 EV/ Net sales (x) 8.9 8.6 7.9 7.0 PB (x) 43.8 42.4 39.3 36.1 Dividend yield (%) 1.2 1.3 1.4 1.6 Free cash flow yield (%) - - - - 04
31 OCT 2017 Quarterly Update Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). 1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com. 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, authors (Research team) and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associates do not have any material conflict of interest. I/we have not served as director, officer or employee in the subject company. Research Team Sr. No Name Designation E-mail 1 Hiren Trivedi Research Associate hiren.trivedi@axissecurities.in 2 Kiran Gawle Associate kiran.gawle@axissecurities.in 5. ASL or its associates has not received any compensation from the subject company in the past twelve months. ASL or its Research Analysts has not been engaged in market making activity for the subject company. 6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL or any of its associates may have: i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or; ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or; iii. Received compensation for products or services other than investment banking, merchant banking or stock broking services from the subject company of this research report; ASL or any of its associates have not received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report Term& Conditions: This report has been prepared by ASL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ASL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ASL will not treat recipients as customers by virtue of their receiving this report. 05
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The Company reserves the right to make modifications and alternations to this document as may be required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the views expressed therein. Copyright in this document vests with Axis Securities Limited. Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. 18002100808/022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkarMarg, Worli, Mumbai 400 025. Compliance Officer: AnandShaha, Email: compliance.officer@axisdirect.in, Tel No: 022-42671582. SEBI-Portfolio Manager Reg. No. INP000000654 06