Jul-14 Aug-14 Oct-14 Nov-14 Dec-14 Feb-15 Mar-15 Apr-15 Jun-15 Jul-15 India Research FMCG July 22, 2015 QUARTERLY REVIEW Bloomberg: HUVR IN Reuters: HLL.BO SELL Higher A&P drove volume growth HUL s Q1FY16 revenues were below while net profit came in line with our estimates. Volume growth during the quarter stood at 6% came in line with our estimate. Operating profit came in line with our estimates increased by 14.4% to Rs15.1 bn. During the quarter, the company was able to report margin expansion in both of its key segments Soaps and detergent and Personal products (PP). Consequently, operating margin expanded 150 bps YoY to 18.6%. PAT increased 3.0% YoY to Rs10.6 bn. Excluding exceptional gain related to property sale the APAT decreased 0.7% YoY to Rs10.5 bn in line with our estimate. We maintain our FY16E and FY17E estimates and price target to Rs839/Share. Maintain SELL Operational performance was satisfactory During Q1FY16, HUL s Revenues jumped 5.0% YoY to Rs81.1 bn came below our estimates of Rs83.7 bn. Domestic consumer business grew by 5.3% - led by 6% volume growth and flattish price realization. Operating profit increased 14.4% YoY to Rs15.1 bn came in line with our estimates. The operating margins expanded by 150 bps YoY to 18.6% led by 360bps drop in RM costs (vs est of 230bps drop) but was partially offset by 200 bps increase in A&P spends. Net profit increased 3.0% YoY to Rs10.6 bn. Excluding exceptional gains related to property sale, the APAT decreased 0.7% YoY to Rs10.5 bn came in line with our estimates. Despite strong growth in operating income, lower increase in APAT can be attributed to lower other income during the quarter (Rs1.1 bn in Q1FY16 vs Rs2.4 bn in Q1FY15) and 310 bps increase in tax rate. We maintain our SELL rating and price target of Rs839/Share Though Q1FY16 performance addressed concerns related to margins and instill some confidence regarding volume growth, we are not fully convinced about the performance in the coming quarters. We continue to remain concerned about the rural growth, slowdown in the economy and trend reversal in the commodity prices. As Q1FY16 results were broadly in line with our expectations, we maintain our estimates and price target of Rs839/Share for HUL until more clarity on rural growth and monsoon in coming couple of months. We maintain our SELL rating on HUL. Key Financials Y/E March (Rs mn) FY13 FY14 FY15 FY16E FY17E Recommendation CMP: Target Price: Previous Target Price: Rs891 Rs839 Rs839 Downside (%) 6% Stock Information Market Cap. (Rs bn / US$ mn) 1,929/30,330 52-week High/Low (Rs) 981/620 3m ADV (Rs mn /US$ mn) 1,285/20.2 Beta 0.7 Sensex/ Nifty 28,182/8,529 Share outstanding (mn) 2,164 Stock Performance (%) 1M 3M 12M YTD Absolute 3.9 2.1 42.0 17.3 Rel. to Sensex 0.7 0.3 29.6 14.4 Performance 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Sensex (LHS) Source: Bloomberg Analysts Contact Sachin Bobade 022 6184 4313 sachin.bobade@karvy.com 1,200 1,000 800 600 400 (RHS) Revenue 258,102 280,191 308,056 343,162 380,352 EBITDA 40,257 44,913 52,083 61,642 66,487 EBITDA margin (%) 15.6 16.0 16.9 18.0 17.5 Adj. Net profit 31,991 36,511 36,510 46,960 50,400 EPS (Rs) 14.8 16.9 16.9 21.7 23.3 RoE (%) 103.4 122.7 103.9 118.8 115.4 RoCE (%) 141.8 162.9 157.6 166.4 163.9 P/E (x) 60.2 52.8 52.8 41.1 38.3
Exhibit 1: Q1FY16 results In Rs Mn Q1FY16 Q1FY15YoY Growth Q4FY15 QoQ Growth Net Sales 81,051 77,163 5.0% 76,756 5.6% Expenditure 65,987 63,998 3.1% 63,575 3.8% Material Cost 39,020 39,896-2.2% 38,270 2.0% % of Sales 48.1% 51.7% -360 bps 49.9% -170 bps Employee Expenses 3,635 3,357 8.3% 3,884-6.4% % of Sales 4.5% 4.4% 10 bps 5.1% -60 bps Selling & Administrative Expenses 11,534 9,449 22.1% 10,279 12.2% % of Sales 14.2% 12.2% 200 bps 13.4% 80 bps Other Expenses 11,798 11,296 4.4% 11,142 5.9% % of Sales 14.6% 14.6% -10 bps 14.5% 0 bps Operating Profit 15,064 13,165 14.4% 13,182 14.3% EBIDTA (%) 18.6% 17.1% 150 bps 17.2% 140 bps Other Income 1,086 2,418-55.1% 984 10.4% Interest 1 63-98.9% 0 #DIV/0! Depreciation 749 667 12.3% 705 6.3% PBT 15,400 14,853 3.7% 13,461 14.4% Tax 4,907 4,285 14.5% 4,477 9.6% APAT 10,494 10,569-0.7% 8,984 16.8% APAT (%) 12.9% 13.7% -70 bps 11.7% 120 bps RPAT 10,591 10,286 3.0% 10,181 4.0% RPAT (%) 13.1% 13.3% -30 bps 13.3% -20 bps AEPS 4.9 4.9-0.7% 4.2 16.8% REPS 4.9 4.8 3.0% 4.7 4.0% 2
Exhibit 2: Segmental Performance Segment Revenues Q1FY16 Q1FY15YoY Growth Q4FY15 QoQ Growth Soaps and Detergents 38,544 38,476 0.2% 36,737 4.9% Personal Products 24,056 21,596 11.4% 22,497 6.9% Beverages 9,149 8,366 9.4% 9,762-6.3% Packaged Foods 6,079 5,438 11.8% 4,768 27.5% Others 3,125 3,029 3.2% 2,947 6.0% Total 80,953 76,904 5.3% 76,711 5.5% Segment PBIT Q1FY16 Q1FY15YoY Growth Q4FY15 QoQ Growth Soaps and Detergents 5,980 5,318 12.4% 4,883 22.5% Personal Products 7,130 5,967 19.5% 6,245 14.2% Beverages 1,435 1,363 5.3% 1,816-21.0% Packaged Foods 544-155 NA 254 114.1% Others -46 591-107.7% -78 NA Total 15,043 13,083 15.0% 13,120 14.7% PBIT Margin Q1FY16 Q1FY15YoY Growth Q4FY15 QoQ Growth Soaps and Detergents 15.5% 13.8% 170 bps 13.3% 220 bps Personal Products 29.6% 27.6% 200 bps 27.8% 190 bps Beverages 15.7% 16.3% -60 bps 18.6% -290 bps Packaged Foods 8.9% -2.8% 1180 bps 5.3% 360 bps Others -1.5% 19.5% -2100 bps -2.7% 120 bps Total 18.6% 17.0% 160 bps 17.1% 150 bps 3
Mixed performance for Soaps & Detergent segment The Soaps & Detergent category during the quarter was able to report mere 0.2% jump in revenues with lower single digit volume growth. Despite promotional offers and increase in A&P spends, the company was not able to uplift the category s revenue performance. Nevertheless, the company was able to post 12.4% EBIT growth to Rs6.0bn during the quarter. Consequently, the EBIT margin expanded by 170 bps ahead of our estimate. We attribute this to significant drop in commodity prices and calculative pricing actions. Overall growth in PP segment was a encouraging Personal products reported 11.4% yoy growth in revenues to Rs24.1bn and 19.5% growth in EBIT to Rs7.1bn. This has led to 200bps expansion in EBIT margin to 29.6%, encouraging considering this was the highest June quarter margin recorded by the company in past 10 years. We attribute this to pricing strategy implemented by the company in select categories, favorable commodity price environment and promotional activities during the quarter. Other businesses reported mixed performance Other segments reported satisfactory performance during the quarter (1) Beverages segment reported 9.4% YoY growth in revenues to Rs9.1 bn and 5.3% YoY jump in EBIT to Rs1.4 bn and (2) Processed Food recorded 11.8% YoY increase in revenues to Rs6.1 bn and EBIT of Rs540 mn compare to an EBIT loss of Rs155mn last year. Despite 200 bps increase in A&P spends, volume growth at 6% - not very encouraging In Q1FY16, HUL s revenues were driven by 6% volume growth and price cuts implemented during the quarter. However, we are not highly encouraged by this considering (1) 200bps increase in A&P spends during the quarter and (2) price cuts on regular interval. Consequently, we continue to believe that the business environment has not improved considerably and the company would have to shell out more to accelerate its volume performance in the coming quarters. Maintain estimates for FY16E and FY17E During Q1FY16, HUL s revenues came below our estimate but Adj Net profit came in line with our estimate. HUL was able to record 6% volume growth during the quarter but continue to witness challenging business environment in rural markets. Considering in line results, we maintain our FY16E and FY17E estimates until more clarity on monsoon and rural performance. We maintain our FY16E EPS estimate at Rs21.7/Share and FY17E EPS estimates at Rs23.3/Share We maintain our SELL rating and price target of Rs839/Share Though Q1FY16 performance addressed concerns related to margins and instill some confidence regarding volume growth, we are not fully convinced about the performance in the coming quarters. We continue to remain concerned about the rural growth, slowdown in the economy and trend reversal in the commodity prices. As Q1FY16 results were broadly in line with our expectations, we maintain our estimates and price target of Rs839/Share for HUL until more clarity on rural growth and monsoon in coming couple of months. We maintain our SELL rating on HUL. 4
Exhibit 3: Profit & Loss Statement (Standalone) Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Revenue 258,102 280,191 308,056 343,162 380,352 % growth 16.7 8.6 9.9 11.4 10.8 Operating expenditure 217,845 235,279 255,973 281,520 313,864 EBITDA 40,257 44,913 52,083 61,642 66,487 % growth 21.0 11.6 16.0 18.4 7.9 Depreciation 2,360 2,606 2,867 3,024 3,181 Other income 5,958 6,173 6,184 7,151 8,282 EBIT 43,855 48,480 55,400 65,768 71,589 Interest 252 360 168 185 204 Exceptional items 5,976 2,164 6,643 0 0 PBT 43,603 48,120 55,232 65,583 71,385 Tax 11,612 11,609 18,722 18,623 20,985 Adjusted PAT 31,991 36,511 36,510 46,960 50,400 % growth 24 14 (0) 29 7 Exhibit 4: Balance Sheet (Standalone) Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Cash & cash equivalents 17,079 22,210 22,739 28,089 35,713 Trade receivables 8,335 8,164 14,481 16,126 17,867 Inventories 25,270 27,475 43,162 48,066 53,252 Loans & advances 10,326 11,432 10,216 11,376 12,604 Other assets 707 719 719 719 719 Investments 26,275 30,948 30,948 30,948 30,948 Fixed Assets 25,085 27,418 27,052 26,528 25,847 Deferred tax assets (liabilities) 2,048 1,617 1,617 1,617 1,617 Total assets 115,125 129,984 150,934 163,469 178,567 Current liabilities & provisions 88,385 97,214 113,405 121,933 132,730 Total liabilities 88,385 97,214 113,405 121,933 132,730 Shareholders' equity 2,163 2,163 2,164 2,164 2,164 Reserves & surpluses 24,578 30,608 35,366 39,373 43,674 Shareholders' funds 26,740 32,771 37,530 41,537 45,837 Total Equity and Liabilities 115,125 129,984 150,934 163,469 178,567 5
Exhibit 5: Cash Flow Statement (Standalone) Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E PBT 43,495 47,997 55,232 65,583 71,385 Depreciation 2,360 2,606 2,867 3,024 3,181 Other non-cash adjustments (1,104) (1,579) 6,643 0 0 Tax paid (10,047) (12,785) (18,722) (18,623) (20,985) Chgange in working capital 4,727 4,788 (4,597) 819 2,643 Cash flow from operating activities 39,431 41,027 41,423 50,803 56,224 (Incr) / decr in capital expenditure (4,049) (5,112) (2,500) (2,500) (2,500) (Incr) / decr in investments (90) (4,182) 0 0 0 Cash flow from investing activities (4,138) (9,294) (2,500) (2,500) (2,500) Issuance of equity - - 0.80 - - Dividend paid (41,258) (28,791) (33,395) (42,953) (46,100) Others 4,744 2,189 (5,000) - - Cash flow from financing activities (36,514) (26,602) (38,394) (42,953) (46,100) Net change in cash (1,222) 5,131 529 5,350 7,624 Opening Cash 18,300 17,079 22,210 22,739 28,089 Closing Cash 17,079 22,210 22,739 28,089 35,713 Exhibit 6: Key Ratios (Standalone) Y/E Mar (%) FY13 FY14 FY15 FY16E FY17E EBITDA margin 15.6 16.0 16.9 18.0 17.5 EBIT margin 17.0 17.3 18.0 19.2 18.8 Net profit margin 12.4 13.0 11.9 13.7 13.3 Dividend payout ratio 129.0 78.9 78.9 78.9 78.9 Net debt: equity (1.6) (1.6) (1.4) (1.4) (1.5) Interest/EBIT 0.0 0.0 0.0 0.0 0.0 RoCE 141.8 162.9 157.6 166.4 163.9 RoE 103.4 122.7 103.9 118.8 115.4 Exhibit 7: Valuation Parameters (Standalone) Y/E Mar FY13 FY14 FY15 FY16E FY17E EPS (Rs) 14.8 16.9 16.9 21.7 23.3 DPS (Rs) 19.1 13.3 13.3 17.1 18.4 Book value per share (Rs) 12.4 15.2 17.3 19.2 21.2 P/E (x) 60.2 52.8 52.8 41.1 38.3 P/BV (x) 72.1 58.8 51.4 46.4 42.1 EV/EBITDA (x) 41.3 37.3 32.7 27.6 25.3 EV/Sales (x) 7.6 7.0 6.3 5.6 5.1 : 6
Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : < 5% For further enquiries please contact: research@karvy.com Tel: +91-22-6184 4300 Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report and whose name(s) is/ are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer Karvy Stock Broking Limited [KSBL] is a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. The subsidiaries and group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production profiling and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources, the respective corporate under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The report and information contained herein is strictly confidential and meant solely for the selected recipient 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 KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. Actual results may differ materially from those set forth in projections 7
July 22, 2015 Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the Hindustan past twelve Unilever months. Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services, realty services, data processing, profiling and related services or in any other capacity. KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. Compensation of KSBL s Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report and have no financial interest in the subject company mentioned in this report. Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that KSBL and Research Analysts primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not received any compensation from the subject company mentioned in the report in the preceding twelve months. It is confirmed that Sachin Bobade, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report. KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities. Karvy Stock Broking Limited Office No. 701, 7 th Floor, Hallmark Business Plaza, Opp.-Gurunanak Hospital, Mumbai 400 051 RegdOff : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad 500 034. Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters. 8