Levered to play recovery in demand; Accumulate May 09, 2016 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating Accumulate Price Rs846 Target Price Rs873 Implied Upside 3.2% Sensex 25,689 Nifty 7,866 (Prices as on May 09, 2016) Trading data Market Cap. (Rs bn) 1,828.4 Shares o/s (m) 2,162.5 3M Avg. Daily value (Rs m) 1154.6 Major shareholders Promoters 67.21% Foreign 13.91% Domestic Inst. 4.81% Public & Other 17% Stock Performance (%) 1M 6M 12M Absolute (0.6) 5.3 (5.6) Relative (4.7) 7.0 (0.3) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 21.8 22.1 1.5 2018 24.6 25.6 3.9 Price Performance (RIC: HLL.BO, BB: HUVR IN) (Rs) 1,000 800 600 400 200 0 May 15 Jul 15 Source: Bloomberg Sep 15 Nov 15 Jan 16 Mar 16 May 16 HUVR posted 4% volume growth and 17.7% EBITDA growth in a scenario of benign commodity costs, S&D price deflation, slowing rural sales and channel rationalisation in personnel care. HUVR seems well placed to gain from potential increase in rural demand due to significant investments in 1) product innovations 2) marketing and distribution revamp and 3) market development in premium segments across categories. Although HUVR is increasing presence in herbal space with brands like Indulekha, Ayush, FAL Ayurvedic etc., we remain vary of rising presence of Patanjali in key categories of Toilet Soaps, Shampoos and Toothpaste. We estimate 15% PAT CAGR over FY16 18; however, distribution of one time dividend and removal of general reserves provision can reduce other income. We value the stock at 35xFY18 and arrive on price target of Rs873. Retain Accumulate. Concall Takeaways: 1) Rural demand has remained subdued; regions like Maharashtra, AP and Karnataka have seen further impact, although Central India is robust. 2) Recent initiatives by GOI and monsoons hold key to improvement in rural demand in FY17 3) Input costs have bottomed out, however, HUVR hopes to drive small margin expansion led by cost control and efficiencies 4) Tax rate is unlikely to change as HUVR has very much hit the peak rate 5) Impact of channel rationalisation is over 6) Volume growth is the key focus area 7) Impact of Modern, Indulekha and rice brands will be reflected in the coming quarters 8) HUVR is growing ahead of market across segments except, oral care 9) HUVR has gained market share in Detergents, led by doubledigit growth in Surf. Gross margins at recent high, Volumes up 4%: Q4 net sales increased by 2.7% on 6% volume growth (7% in Q2). Gross profit grew 8% as margins expanded by 260bps; EBITDA margins expanded by 210bps as 50bps higher staff cost and 20bps higher adpro neutralised gains. Other income declined by 16%. 280bps lower tax rate at 29.5% resulted in 19.5% growth in adjusted PAT at Rs10.3bn. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 308,056 319,872 353,728 401,739 Growth (%) 9.9 3.8 10.6 13.6 EBITDA (Rs m) 52,082 57,299 67,846 77,073 PAT (Rs m) 37,946 40,824 47,179 53,216 EPS (Rs) 17.5 18.9 21.8 24.6 Growth (%) 6.7 7.6 15.6 12.8 Net DPS (Rs) 15.0 1 17.5 19.0 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 16.9 17.9 19.2 19.2 RoE (%) 108.4 110.2 125.1 131.6 RoCE (%) 83.3 94.1 105.8 101.3 EV / sales (x) 5.8 5.6 5.0 4.4 EV / EBITDA (x) 34.1 31.0 26.2 23.0 PE (x) 48.2 44.8 38.8 34.4 P / BV (x) 49.1 49.6 47.4 43.3 Net dividend yield (%) 1.8 1.9 2.1 2.2 Source: Company Data; PL Research Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Hindustan Unilever Exhibit 1: Results (Rs m): Volumes up 4%, Adj. PAT up 19.5% on higher margins and lower tax rate Y/e March YoY gr. (%) FY16 FY15 YoY gr. (%) Net Sales 79,457 76,041 4.5 79,810 319,872 307,341 4.1 Gross Profit 41,763 37,772 10.6 42,389 166,742 151,106 10.3 % of NS 52.6 49.7 53.1 52.1 49.2 10,900 10,279 11,378 45,262 38,749 Advertising & Prom Exp. % of NS 16.8 13.7 13.5 14.3 14.1 12.6 Total Expenses 64,788 63,575 1.9 65,502 262,573 256,298 2.4 EBITDA 14,668 12,467 17.7 14,308 57,299 51,043 12.3 18.5 16.4 2.1 17.9 17.9 16.6 875 705 24.1 822 3,208 2,867 11.9 13,793 11,762 17.3 13,487 54,092 48,176 12.3 Margins (%) Depreciation EBIT Interest 0 1 2 168 (98.9) 823 984 (16.4) 1,396 5,006 6,184 (19.0) 14,615 12,746 14.7 14,882 59,096 54,192 9.1 4,307 4,119 4.5 4,644 18,318 16,246 12.8 29.5 32.3 31.2 31.0 3 Adjusted PAT 10,309 8,626 19.5 10,239 40,778 37,946 7.5 Extraordinary 587 1,555 62.2 (525) 45 5,207 (99.1) 10,896 10,181 7.0 9,714 40,824 43,153 (5.4) Other Income PBT Tax Effective tax rate (%) Reported Profit HUVR is sustaining innovation and renovation of portfolio May 09, 2016 2
Exhibit 2: FMCG sales growth at 4% on muted rural demand Exhibit 3: Volumes growth dips to 4% (%) 1 1 12.0 1 8.0 2.0 9.0 13.4 10.4 8.0 9.0 5.0 5.0 3.0 (%) 8.0 7.0 5.0 3.0 2.0 1.0 3.0 5.0 3.0 7.0 Exhibit 4: Ad spend up 6%, up 20bps YoY (%) 15.0 14.2 14.4 14.3 1 13.5 13.0 12.6 12.2 12.1 11.8 12.0 11.0 1 13.7 Exhibit 5: Gross margin up 290bps; EBITDA margins up 210bps 5 52.0 5 48.0 4 4 42.0 15.2 47.4 49.7 Gross Margins (%) 16.4 EBITDA Margins (%) (RHS) 18.5 52.6 19.0 18.0 17.0 1 15.0 1 13.0 12.0 May 09, 2016 3
Exhibit 6: Brent Crude Oil have started moving up, Exit rate US$40 Exhibit 7: PFAD: Prices have bounced sharply, Q4 exit at US$639 (US$ / bbl) 120 100 80 60 40 20 0 109 108 108 76 57.0 62.0 5 4 35.0 (US$ / Tonne) 900 800 700 600 500 400 300 200 100 0 790 823 727 618 723.0 652.0 565.0 482.0 432.0 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Exhibit 8: Rupee has depreciated by 8.7% YoY Exhibit 9: LAB prices are down 6% YoY and flat QoQ 7 68.0 6 6 62.0 6 58.0 5 5 61.8 4QFY14 59.8 1QFY15 60 2QFY15 62 62.2 3QFY15 4QFY15 63.8 1QFY16 66.2 65.9 2QFY16 3QFY16 67.6 4QFY16 (Rs/Kg) 14 13 12 11 10 9 8 7 6 112.1 110.1 138.1 119.1 126.1 89.1 103.1 86.1 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Source :PL Research May 09, 2016 4
Soaps & Detergents: Deflation impacts value growth, Surf sustains double digit volume growth Exhibit 10: HUVR focusing on volume growth and premiumisation in key brands Soaps & Detergents 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Net Sales (Rs m) 33,979 34,971 38,476 37,551 36,002 36,737 38,544 38,166 36,298 37,525 Sales Growth % 7.1 9.6 12.9 11.1 5.0 0.2 1.6 0.8 2.1 EBIT (Rs m) 4,509 4,217 5,318 5,112 5,024 4,883 5,980 4,903 5,089 5,449 EBIT Growth % 14.5 10.1 21.1 7.9 11.4 15.8 12.4 (4.1) 1.3 11.6 EBIT Margin % 13.3 12.1 13.8 13.6 1 13.3 15.5 12.8 1 14.5 Soaps and Detergent sales increased by 2.1% as the pace of deflation is coming down QoQ. HUVR faced price deflation in Soaps and certain Detergent categories. EBIT increased 11.6% as margins increased by 120bps to 14.5%. Surf s strong growth momentum continued, led by double digit volume growth. Dove, Hamam and Lifebuoy posted strong volumes growth. HUVR continues to undertake market development in liquids category which includes Handwash, Sanitizers, Body wash, Comfort fabric conditioners and Vim Liquid; sustained consumer shift holds potential to accelerate overall growth. Wheel continued to show improvement post relaunch in ; however, high base effect resulted in subdued growth. HUVR is able to maintain strong volume growth in Soaps and Detergents in a deflationary environment, with price cuts now in the base and an expected recovery in rural demand on expectation of good monsoons augurs well for HUVR. However, Patanjali has been able to make significant inroads in the Soap segment with its herbal offerings which can potentially impact HUVR s sales growth. Exhibit 11: Soap and Detergent sales up 2.1%; margins up 120bps Exhibit 12: PFAD prices down 4.4% YoY and up 40.2% QoQ 17.0 15.0 13.0 11.0 9.0 7.0 5.0 EBIT Margin (%) (RHS) 12.9 12.1 11.1 1 13.3 9.6 13.8 13.6 5.0 15.5 0.2 Sales Growth (%) (RHS) 12.8 1.6 1 14.5 0.8 2.1 1 12.0 1 8.0 2.0 6 4 (%) 2 2 4 16.3 18.5 13.5 27.5 35.0 9.4 54.3 37.9 19.4 YoY 13.3 17.2 10.3 5.3 1.3 QoQ 4.6 11.1 13.6 4.3 2.4 17.9 14.9 18.1 18.9 21.9 27.8 28.9 40.2 4.4 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Source: Bloomberg, PL Research May 09, 2016 5
Personal care: Channel rationalisation impacts sales, EBIT margins up 170bps Exhibit 13: Personal care sales impacted by delayed winters and channel spend rationalisation Personal Products 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Net Sales (Rs m) 23,039 19,833 21,596 21,427 24,546 22,497 24,056 23,456 25,929 23,124 Sales Growth % 12.4 8.3 14.7 9.9 6.5 13.4 11.4 9.5 5.6 2.8 EBIT (Rs m) 6,592 4,958 5,967 5,223 6,809 6,245 7,130 6,119 7,483 6,822 EBIT Growth % 13.9 5.1 27.4 17.4 3.3 2 19.5 17.2 9.9 9.2 EBIT Margin % 28.6 25.0 27.6 24.4 27.7 27.8 29.6 26.1 28.9 29.5 Personal care sales grew 2.8%, EBIT increased by 9.2% as margins expanded by 170bps to 29.5%. Excise duty refund in the base quarter and residual channel spend rationalisation impacted sales growth which would have been 7% in Q4 but for these one off impacts. FY16 volumes increased by 6% and sales grew 10% Despite price cuts in Shampoos, there is no shift from sachets to bottles, nor has category growth picked up. HUVR has re launched Pepsodent with new formulation and the impact of this is yet to be reflected. Axe Signature has been doing well although category growth rates have remained tepid. Both Ponds and Lakme have done well in skin creams. Sustained innovation in the Lakme color cosmetics range enabled double digit growth in Absolute and 9 to5 range. Exhibit 14: Personal care: Excise and Channel rationalisation impacts sales growth Sales Growth (%) EBIT Margin (%) (RHS) 1 1 12.0 1 8.0 2.0 25.0 8.3 27.6 14.7 24.4 9.9 27.7 27.8 6.5 13.4 29.6 11.4 26.1 9.5 28.9 5.6 29.5 2.8 35.0 3 25.0 2 15.0 1 5.0 May 09, 2016 6
Beverages EBIT up 9.5%; Processed foods EBIT Rs304m, new launches in Knorr, Kissan and Magnum Exhibit 15: Beverages EBIT margins at 19.2% at 10 year high Beverages 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Net Sales (Rs m) 8,500 8,690 8,366 8,991 9,197 9,762 9,149 9,526 9,841 10,362 Sales Growth % 7.2 7.5 10.5 7.6 8.2 12.3 9.4 5.9 7.0 6.1 EBIT (Rs m) 1,373 1,630 1,363 1,557 1,410 1,816 1,435 1,378 1,728 1,988 EBIT Growth % (2.2) 19.7 (1.8) 9.9 2.7 11.4 5.3 (11.5) 22.6 9.5 EBIT Margin % 16.2 18.8 16.3 17.3 15.3 18.6 15.7 14.5 17.6 19.2 Exhibit 16: Processed foods sales up 11.7%, EBIT margins at 5.7% Processed Foods 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Net Sales (Rs m) 3,728 4,197 5,438 4,513 4,199 4,768 6,079 5,071 4,695 5,325 Sales Growth % 12.9 12.7 18.8 13.4 12.6 13.6 11.8 12.4 11.8 11.7 EBIT (Rs m) (134) 230 591 200 (213) 254 544 269 149 304 EBIT Growth % (409.5) 64.4 53.8 50.1 58.7 10.6 (7.9) 34.5 170.3 19.8 EBIT Margin % (3.6) 5.5 10.9 4.4 (5.1) 5.3 8.9 5.3 3.2 5.7 Beverages reported 6% sales growth, while EBIT increased by 19.2% to Rs1.98bn as margins increased by 60bps. HUVR market development initiatives are reflecting in strong growth momentum for Lipton Green Tea. Bru in Coffee achieved market leadership with its sustained double digit growth in the last few quarters led by market development in interiors and distribution expansion for the product. Processed foods sales increased 11.7% led by broad based double digit growth across key brands. Kissan ketchup, Instant Soups and Kwality walls sustained growth on market development initiatives taken by HUVR. HUVR launched a new range of Knorr wrap and roll mix and Chinese noodles. HUVR also launched premium Jams under the Kissan brand. HUVR also launched Choco Brownie and Cornetto Choco Coffee under the Magnum range. We believe that Knorr Chinese noodles have a unique proposition which will enable HUVR to increase its presence in Rs20bn instant noodles market. We believe that new launches in Noodles, Magnum, Jams and Coffee will enable HUVR to sustain double digit growth in foods. May 09, 2016 7
Exhibit 17: Segmental Performance Quarterly Segmental 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 Net Sales (Rs m) Soaps and Detergents 34,971 38,476 37,551 36,002 36,737 38,544 38,166 79,710 79,368 Personal Products 19,833 21,596 21,427 24,546 22,497 24,056 23,456 36,298 37,525 Beverages 8,690 8,366 8,991 9,197 9,762 9,149 9,526 25,929 23,124 Processed Foods 4,197 5,438 4,513 4,199 4,768 6,079 5,071 9,841 10,362 Others 2,958 3,029 3,618 3,535 2,947 3,125 3,243 4,695 5,325 Sales Growth % Soaps and Detergents 9.6 12.9 11.1 5.0 0.2 1.6 2.9 2.1 Personal Products 8.3 14.7 9.9 6.5 13.4 11.4 9.5 0.8 2.8 Beverages 7.5 10.5 7.6 8.2 12.3 9.4 5.9 5.6 6.1 Processed Foods 12.7 18.8 13.4 12.6 13.6 11.8 12.4 7.0 11.7 Others 18.2 8.5 18.7 27.8 (0.4) 3.2 (10.4) 11.8 2.9 EBIT (Rs m) 10,785 13,083 12,207 12,993 13,120 15,043 12,773 14,097 14,485 Soaps and Detergents 4,217 5,318 5,112 5,024 4,883 5,980 4,903 5,089 5,449 Personal Products 4,958 5,967 5,223 6,809 6,245 7,130 6,119 7,483 6,822 Beverages 1,630 1,363 1,557 1,410 1,816 1,435 1,378 1,728 1,988 Processed Foods 230 591 200 (213) 254 544 269 149 304 Others (251) (155) 116 (38) (78) (46) 104 (353) (78) EBIT Growth % Soaps and Detergents 10.1 21.1 7.9 11.4 15.8 12.4 (4.1) 8.5 10.4 Personal Products 5.1 27.4 17.4 3.3 2 19.5 17.2 1.3 11.6 Beverages 19.7 (1.8) 9.9 2.7 11.4 5.3 (11.5) 9.9 9.2 Processed Foods 64.4 53.8 50.1 58.7 10.6 (7.9) 34.5 22.6 9.5 Others (38.6) (401.6) 150.4 (72.1) (68.7) 70.5 9.9 (170.3) 19.8 EBIT Margin % Soaps and Detergents 12.1 13.8 13.6 1 13.3 15.5 12.8 1 14.5 Personal Products 25.0 27.6 24.4 27.7 27.8 29.6 26.1 28.9 29.5 Beverages 18.8 16.3 17.3 15.3 18.6 15.7 14.5 17.6 19.2 Processed Foods 5.5 10.9 4.4 (5.1) 5.3 8.9 5.3 3.2 5.7 May 09, 2016 8
Income Statement (Rs m) Y/e March 2015 2016 2017E 2018E Net Revenue 308,056 319,872 353,728 401,739 Raw Material Expenses 156,236 153,130 170,062 197,706 Gross Profit 151,821 166,742 183,666 204,032 Employee Cost 15,789 15,920 17,036 18,841 Other Expenses 83,949 93,522 98,783 108,118 EBITDA 52,082 57,299 67,846 77,073 Depr. & Amortization 2,867 3,208 3,374 3,638 Net Interest 168 2 25 25 Other Income 6,184 5,006 4,628 4,849 Profit before Tax 55,231 59,096 69,075 78,260 Total Tax 17,285 18,318 21,897 25,043 Profit after Tax 37,946 40,778 47,179 53,216 Ex Od items / Min. Int. 10,413 45 Adj. PAT 37,946 40,824 47,179 53,216 Avg. Shares O/S (m) 2,163.5 2,163.9 2,163.5 2,163.5 EPS (Rs.) 17.5 18.9 21.8 24.6 Cash Flow Abstract (Rs m) Y/e March 2015 2016 2017E 2018E C/F from Operations 55,852 47,115 56,101 66,379 C/F from Investing (8,283) (1,641) (4,835) (11,126) C/F from Financing (46,472) (45,926) (51,258) (55,491) Inc. / Dec. in Cash 1,096 (452) 8 (238) Opening Cash 7,047 8,143 7,471 7,632 Closing Cash 8,143 7,471 7,632 7,709 FCFF 41,157 52,304 31,848 55,417 FCFE 41,157 52,304 31,848 55,417 Key Financial Metrics Y/e March 2015 2016 2017E 2018E Growth Revenue (%) 9.9 3.8 10.6 13.6 EBITDA (%) 16.4 1 18.4 13.6 PAT (%) 6.7 7.6 15.6 12.8 EPS (%) 6.7 7.6 15.6 12.8 Profitability EBITDA Margin (%) 16.9 17.9 19.2 19.2 PAT Margin (%) 12.3 12.8 13.3 13.2 RoCE (%) 83.3 94.1 105.8 101.3 RoE (%) 108.4 110.2 125.1 131.6 Balance Sheet Net Debt : Equity (1.4) (1.4) (1.3) (1.4) Net Wrkng Cap. (days) (53) (59) (40) (35) Valuation PER (x) 48.2 44.8 38.8 34.4 P / B (x) 49.1 49.6 47.4 43.3 EV / EBITDA (x) 34.1 31.0 26.2 23.0 EV / Sales (x) 5.8 5.6 5.0 4.4 Earnings Quality Eff. Tax Rate 31.3 31.0 31.7 32.0 Other Inc / PBT 11.2 8.5 6.7 6.2 Eff. Depr. Rate (%) 6.1 6.3 6.2 6.2 FCFE / PAT 108.5 128.1 67.5 104.1. Balance Sheet Abstract (Rs m) Y/e March 2015 2016 2017E 2018E Shareholder's Funds 37,248 36,873 38,581 42,265 Total Debt Other Liabilities 10,495 2,182 11,593 12,698 Total Liabilities 47,743 39,055 50,175 54,962 Net Fixed Assets 29,365 33,007 30,043 30,656 Goodwill Investments 6,541 6,690 6,541 6,541 Net Current Assets 9,877 (2,951) 11,565 15,704 Cash & Equivalents 51,618 50,563 50,374 57,327 Other Current Assets 46,856 49,101 56,808 63,467 Current Liabilities 88,597 102,615 95,618 105,091 Other Assets 1,960 2,309 2,026 2,061 Total Assets 47,743 39,055 50,175 54,962 Quarterly Financials (Rs m) Y/e March Net Revenue 81,051 79,554 79,810 79,457 EBITDA 15,064 13,259 14,308 14,668 % of revenue 18.6 16.7 17.9 18.5 Depr. & Amortization 749 761 822 875 Net Interest 1 1 Other Income 1,086 1,702 1,396 823 Profit before Tax 15,400 14,199 14,882 14,615 Total Tax 4,873 4,495 4,644 4,307 Profit after Tax 10,591 9,622 9,714 10,896 Adj. PAT 10,528 9,703 10,239 10,309 Key Operating Metrics Y/e March 2015 2016 2017E 2018E Volume Growth % 3.4 6.2 7.6 8.3 Gross Margin % 49.3 51.8 51.9 50.8 Ad spends% 12.8 14.3 13.2 12.7 Tax Rate % 30.7 31.5 31.7 32.0 Personal care Sales Gr % 10.9 10.2 13.7 16.5 Personal Care Margins % 26.9 27.4 27.8 28.2 S&D Sales Gr % 8.7 2.2 8.2 11.8 S&D Margins % 13.7 14.7 14.8 15.0. May 09, 2016 9
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