RESULT UPDATE

HINDUSTAN Volume and margin recover; sustainability is the key

India Equity Research| Consumer Goods

EDELWEISS 4D RATINGS (HUL) pleasantly surprised with marginal beat on Q1FY15 volume growth at 5% YoY (adjusted for transportation strike in Absolute Rating REDUCE the base) and higher margin. Key positives were: (1) strong sales growth Rating Relative to Sector Underperformer of 13% YoY in soaps & detergents (6 of HUL grew in double digits Risk Rating Relative to Sector Low versus GCPL’s 2% YoY growth in soaps), 15% YoY growth in personal Sector Relative to Market Underweight products (PP; highest in past 8 quarters), and 19% YoY growth in packaged foods (PF; highest in past 11 quarters); (2) double-digit growth MARKET DATA (R: HLL.BO, B: HUVR IN) in Fair & Lovely (FAL), as highlighted by us earlier; (3) recovery in PP CMP : INR 687 margin; and (4) EBITDA margin rose ~70bp YoY post adjustment in salary Target Price : INR 637 costs despite higher royalty (~50bps). Key negative was muted growth in 52-week range (INR) : 692 / 536 and . Maintain ‘REDUCE’ on valuations. Share in issue (mn) : 2,163.1 M cap (INR bn/USD mn) : 1,486 / 24,706 This report also contains Q1FY15 and Q4FY14 conference call highlights. Avg. Daily Vol.BSE/NSE(‘000) : 1,522.3

Margins improved in S&D, PP and PF SHARE HOLDING PATTERN (%)

Margins improved across segments barring beverages. Employee cost includes one- Current Q4FY14 Q3FY14 Promoters * 67.2 67.2 67.3 time credit of INR324.4mn owing to unutilised pension corpus relating to earlier years. Other costs were down 17bps YoY despite rise in royalty payment due to savings on MF's, FI's & BK’s 4.1 4.1 3.3 better supply chain management. FII's 14.6 14.1 14.8 Others 14.1 14.5 14.6 * Promoters pledged shares : NIL Key takeaways from conference call (% of share in issue)

Promotional intensity has subsided in soaps, remains high in oral care. Media intensity for sector has reduced leading to cut in A&P spends, but HUL remains competitive across PRICE PERFORMANCE (%) EW Consumer segments. Sachets grew at higher rate, especially in shampoos. Modern trade remains Stock Nifty challenging, but is seeing signs of stabilisation (new store openings a key monitorable). Goods Index FAL posted strong recovery with double-digit growth, but Pepsodent, Axe and were 1 month (0.5) (0.9) (1.1) relative laggards. Pressure on raw materials continues with PFAD up 44% YoY, ~1% QoQ. 3 months 3.4 11.6 (0.7) 12 months 4.1 29.5 (0.7)

Outlook and valuations: Cautious; maintain ‘REDUCE’

We remain positive on HUL’s longer term growth, though sustainability of volume growth and margins remain key monitorables. Recent run up in the stock largely Abneesh Roy +91 22 6620 3141 factors in the Q1FY15 beat. On valuations, we maintain ‘REDUCE/SU’ on the stock. [email protected]

Financials (INR mn) Pooja Lath Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E +91 22 6620 3075 [email protected] Net rev. 77,163 68,090 13.3 70,941 8.8 292,333 329,632 371,785 EBITDA 13,165 10,856 21.3 10,776 22.2 47,417 54,811 60,845 Tanmay Sharma +91 22 4040 7586 Profit 10,569 10,193 3.7 8,721 21.2 39,456 41,670 45,915 [email protected] Dil. EPS (INR) 4.7 4.1 14.9 3.8 22.3 17.1 19.1 21.2 Alankar Garude Diluted P/E (x) 40.1 36.0 32.4 +91 22 6623 3301 EV/EBITDA (x) 30.3 26.1 23.4 [email protected]

ROAE (%) 115.8 106.2 99.3 * Quarterly nos. standalone; annual nos. consolidated July 28, 2014 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Consumer Goods

HUL Q1FY15 concall | Key takeaways Growth: HUL’s like-to-like volume growth (adjusted for transport strike in Q1FY14) is 5% YoY in Q1FY15. In all its segments, HUL reported double digit growth and grew ahead of the market. Overall demand scenario continued to remain subdued both in value and volume terms. Discretionary categories continue to remain under pressure.

Urban and rural growth: Both rural and urban growth is coming down. However, gap between rural and urban growth has been reducing.

Premiumisation: As premiumisation is coming off, demand for high margin packs is coming off. Unless, premiumisation comes back, margins will remain under pressure.

Soaps & detergents: There was broad-based growth in the soaps category in Q1FY15. Judicious pricing was done by HUL to tackle rising input prices. delivered one of its strongest quarters.

Personal products (PP): PP represents a large opportunity and will be a growth driver as market and consumers evolve. Overall, this business appears healthy. As and when markets look up, personal products will do well. Growth in PP category in base quarter was low, which has helped report growth in Q1FY15. HUL’s endeavour remains to be ahead of market at every point of time. FAL coming back has helped margins. There have been lower A&P spends in this category in Q1FY15. These two factors have helped margin expansion in the PP category. Post re-launch, FAL has delivered double digit growth. Ponds has also done well. Overall, skin care delivered strong performance in Q1FY15. Volume growth has decelerated in the past few quarters in the toothpaste segment for HUL. Close-up is doing well. Pepsodent’s growth is still subdued and there is work left to be done to revive Pepsodent’s growth.

Packaged foods: Performance in this category has been very decent over past several quarters. Packaged foods is still a very nascent category in India. HUL will continue to invest and build this market. ’s performance can be improved further. Innovative campaign helped deliver growth in Kissan. Kwality walls and performed quite well.

Standout performances in Q1FY15: Lakme, Surf and the skin cleansing portfolio delivered standout performances.

Possible areas of improvement: Pepsodent, Clear shampoo and Axe are brands where improvement is needed.

Modern trade: Growth rates are significantly lower than peak growth. Same store sales growth has also come off, but seems to be stabilising. It will take at least one quarter before the management can decide whether growth in modern trade has stabilized. New store openings is a key monitorable for growth in modern trade. This channel plays a key role in aiding premiumisation.

Perfect villages: There are ~9,000 villages under Perfect village. Perfect Villages have been growing at a faster pace as compared to other villages.

2 Edelweiss Securities Limited Hindustan Unilever

Sachets: In urban as well as rural areas, sachets have grown faster than pack format. Aspiration of consumers to buy branded products is being witnessed by HUL. But access to premium products is happening via a sachet.

Raw material costs: Raw material costs continue to be high. PFAD prices are high in both INR and USD terms.

A&P: Media intensity (as measured by GRPs) has come down; however competitive intensity (innovations) continues to remain high. Now, the competition is more rational. Lower media intensity points towards little or no impact of 12 minute ad cap. Ad spends are moving from TV to other media. Promotional intensity in soaps has come off, but promotional intensity remains high in oral segment.

Other expenses: Supply chain control costs have helped deliver efficiencies. These efficiencies lead to higher volume, which helps in operating leverage. Pureit: Pureit has achieved breakeven in last two years. HUL is the market leader in this category in the retail segment. Pureit Ultima has done very well. Unilever as well as HUL are very serious about this category.

Online retailing: Online is very small part of HUL’s business. Right now, HUL does not supply directly to online retailing. Going ahead, the management feels that online retailing has immense potential.

One-time credit of INR324.4mn in employee costs: HUL uses a defined contribution scheme for calculating pension liability. Pension policy states that if an employee has completed more than 5 years in the company, he/she is eligible for pension. This means that there is no pension for employees who leave the company within 5 years. Hence, an adjustment for these employees (who leave the firm within 5 years) has to be done. This adjustment was done by HUL in Q1FY15 for prior periods as well. Hence, it can be regarded as a one-off.

Capex: HUL is not worried about competitors’ capex plans. Usually, there has been a steady trend of HUL’s capex.

Tax rate in FY15: 29-30%.

Dividend payout: Dividend payout will continue to remain steady.

Further increase in Unilever stake: This decision is at the discretion of Unilever management and HUL does not have any say in this.

Unilever | Product launches that can potentially happen in India in our view 1. Compressed deodorants: Present in four European countries 2. Regenerate enamel science toothpaste: Launched in UK 3. dual action capsules: Launched in three European countries 4. Knorr Baking Bags: Present in 40 countries

3 Edelweiss Securities Limited Consumer Goods

Compressed deodorants: Present in four European countries

• Unilever launched compressed deodorants (innovation in deodorants in over 40 year) in four European countries.

• The new cans are 75ml, half the size of existing cans, but deliver the same amount of protection and fragrance in the same spray time as the full sized can.

• The compressed deodorants give consumers the same performance as regular variants, but are more environmental friendly, as it requires half the amount of propellant. • Our View: If launched in India, the compressed deodorants could potentially help HUL to come out with an innovation in a commoditised market.

REGENERATE Enamel Science (Launched in UK) Unilever’s Regenerate Enamel Science Advanced Toothpaste claims to regenerate 82% of tooth enamel after just three days of use. This oral care innovaton launched in UK is priced at GBP10 for 100gms. It contains calcium silicate and sodium phosphate, which effectively re-builds a new layer of white enamel on the teeth. The company is presenting the toothpaste as a beauty product that will sit alongside expensive age-defying creams and potions. The system helps to form a fresh supply of minerals which wrap and integrate into the surface of the teeth. The technology appears to work much like re-plastering a wall, filling any microscopic holes caused by fizzy drinks or sugary foods to leave a strong, smooth finish. The company claims this has the effect of restoring teeth to their original whiteness while making them much stronger, which means they are less likely to develop cavities. Unilever says the technology requires the use of a ‘Boosting Serum’ treatment, which costs another £30, once a month and is applied using two custom-fit mouth trays. Comparison between toothpastes

• Close-Up Diamond attraction cost is GBP7.85 for 50gms and GBP10.85 for 100gms. • Regenerate Enamel Science Advanced Toothpaste cost GBP10 for 75ml. • Sensodyne Repair and Protect toothpaste, which costs GBP4.49 for 75ml, promotes itself on the basis it is possible to treat the pain of sensitive teeth by repairing vulnerable areas of tooth enamel. Our View: If enamel toothpaste (a huge innovation in toothpaste segment) is launched in India, it will help HUL to regain market share in the toothpaste segment (Close Up had a good quarter due to growth in small packs, while Pepsodent was impacted by the high promotional intensity by competition in Q4FY14). Colgate is market leader with 57.1% market share. However, in our view, as India may not be ready for such a product as yet the launch could take some time. Knorr baking bags contains 10 products

1. Done everything 2. Pot of vegetables broth – salt 3. Pot of chicken broth – salt 4. Cod herbs and lemon butter 5. Salmon with dill sauce

6. Rustic potatoes

4 Edelweiss Securities Limited Hindustan Unilever

7. Nuggets, chicken curry sauce 8. Mushroom sauce 9. Pork ribs, tomato and paprika 10. Basquaise chicken with mixed vegetables These are ready-to-cook products.

Our View: These launches in India will not make much sense for HUL as the ready-to-cook category size is small and Indian consumers prefer fresh food over packet foods and baking is not popular for mainstream food.

Persil Dual Action Capsules (GBP7 for 17 capsules) • The next generation of Persil capsules now combine the power of our stain-removing micro-granules + boosted concentrated liquid, to offer even better tough stain removal for outstanding first-time results. • One wash/capsule. • The game has been created to promote Persil's new "dual action capsule". Consumers will be asked to drag the capsule full of stain-removing micro-granules into the hollow centre of the capsule it sits within, which is filled with concentrated liquid. Our View: Though the Persil Dual product is innovative, it will not work in India at present due to its high price per wash. However, the innovative advertising used to promote the Persil products could be used by HUL to promote its other products in India.

Unilever: Converting operational performance into EPS • To convert operational performance into EPS, Unilever decided to reduce long-term pension exposure in many countries (India being one of them). • Full impact of reducing long-term pension exposure in HUL will be understood during Unilever Q2CY14 conference call.

Toothpaste - Peer performance • HUL toothpaste Closeup is doing well while Pepsodent’s growth is still subdued and there is work left to be done to revive Pepsodent’s growth. Volume growth has decelerated in the past few quarters in the toothpaste segment for HUL.

• However Colgate clocked 4% YoY volume growth in Q1FY15 despite of the industry volume declining by 4% YoY in Q1FY15. Colgate’s volume market share in toothpaste stood at 57% (improved 110bps YoY during H1CY14).

• Dabur oral care segment grew 8% YoY in Q1FY15 with 10.7% YoY growth in toothpaste backed by growth in Dabur Red Toothpaste and Meswak toothpaste which registered double digit growth and also gained market share.

CloseUp Diamond Attraction toothpaste launched • Co-created with cosmetic dentists from different countries. • It is a dental bleaching line that uses blue-light technology. • Uses exclusive blue-light technology, which with one brush coats teeth with a blue film and creates an optical effect that makes teeth appear whiter instantly.

5 Edelweiss Securities Limited Consumer Goods

• It has three times more power teeth bleaching since first brushing. • Diamond Attraction also contains silica, which removes stains and progressively whitens teeth with continued use.

• It is targeted towards the youth that lay strong emphasis on cosmetic care of teeth. • Available in two variants in the Middle East – Power White (for instant whitening) and Fresh White (for everyday whiteness).

• Unilever, Brazil launched Close Up Diamond Attraction in May 2013 in three variants – Power White, Fresh White and Delicate White (for sensitive teeth).

• Under Diamond Attraction, Unilever in Brazil launched mouthwashes in three variants (priced at USD13 for 250ml) in January 2014.

Q4FY14 conference call | Key takeaways Revenue growth: HUL’s total sales rose 9% YoY to INR69.36bn with 3% YoY volume growth (4% YoY in Q3FY14) versus 6% YoY in Q4FY13. Sluggish market growth in Q4FY14 translated into lower volume growth for the company as well. Especially, growth in premium and discretionary segments was challenging as LUPs saw better growth.

Modern trade: All channels clocked slower growth, but growth in modern trade was slower than in other channels. Downtrading: HUL did not face significant downtrading as was the case in 2009, though a bit of downtrading was noticed.

Soaps & detergents: S&D grew 9.6% YoY with EBIT margin improving 6bps YoY to 12.1% (as a percentage of sales) led by strong performance in , , and Breeze. Skin cleansing portfolio grew riding robust liquid portfolio. It was also aided by price growth as cost inflation was managed by taking judicious price actions. Lifebuoy handwash also delivered strong performance in liquid segment.

Laundry portfolio surged due to strong performance in Surf (premium segment product) which maintained its double digit growth momentum. Rin clocked good growth in bar segment. Wheel, re-launched last quarter, delivered growth as well. While Comfort Fabric Conditioners continued to perform well, led the performance in household care segment.

Personal Products: HUL’s personal products delivered good growth of 8.3% YoY versus ~12.1% YoY in Q4FY13 (12.4% YoY in Q3FY14). Margins declined 76bps YoY to 25%.

Skin care segment, though a soft market, is yielding positive results due to the re-launch of Fair & Lovely with the new ‘Best Activation Formula’ backed by a focused activation plan. For the first time, INR5 pack was introduced. In the premium segment, Ponds performed well while Lakme and Dove continued to do well driven by innovations due to introduction of 9 to 5 super sunscreens. The facial cleansing portfolio registered broad-based growth.

Hair care maintained growth trajectory with double-digit volume growth, which was driven by Dove and Clinic Plus. TRESemmé (INR1bn brand) introduced last year continued its good performance due to the addition of a new Split Remedy variant. Sachet format is growing faster in hair care category.

6 Edelweiss Securities Limited Hindustan Unilever

Significant investments made in oral care segment will sustain the competitiveness in the industry. Close Up had a good quarter due to growth in small packs while Pepsodent was impacted by the high promotional intensity by competition. Management is taking actions to improve performance in this sector.

Colour cosmetics witnessed strong innovation-led growth backed by Lakme and Elle 18. HUL has strengthened its position in the premium segment by offering exciting and contemporary products.

Beverages: The beverages portfolio grew 7.5% YoY to INR8,690mn (7.2% YoY growth in Q3FY14 and 18.3% YoY in Q4FY13), while margins increases 191bps YoY in Q4FY14. In the tea portfolio, which sustained double digit growth, brands like Taj Mahal, Red Label and 3 Roses grew in double digits due to better mix and focused in market activities. Sale of flavoured and green tea bags more than doubled in Q4FY14. Bru Gold performed well in the coffee segment.

Packaged foods: This business grew 12.7% YoY, while margin surged 172bps YoY. Segment growth was driven by Kissan (both ketchups and jams) due to impactful activation. Instant soups saw strong growth in the Knorr portfolio with volumes more than doubling in Q4FY14. “Expe rience Model” trials are being rolled out in modern trade to drive results. Ice cream segment registered strong growth due to extension of selling Magnum now to total 5 cities (commenced in Chennai). Kwality Walls also posted robust performance due to focused in market activities.

Water business: Though a challenging segment, HUL’s innovation led products continued to perform well. Pureit Ultima (RO + UV) was launched in the premium category and through stepped up in-store execution. The company has also come out with an ‘exchange old for new’ offer which is promising. This segment is now been profitable for the past two years.

Innovations: HUL made some activations, market executions and series of innovations in Q4FY14. Innovations were seen in brands like Pureit, Wheel, etc., Activation programmes were carried out in brands like Close up and Lifebuoy and in the food portfolio in brands like Bru Gold and Knorr.

Gross margins: In Q4FY14, gross margins increased 12bps YoY helped by good pricing strategy and low promotions. Input costs inched up owing to INR depreciation. PFAD price increased from INR32.3/kg in Q4FY13 to INR48.8/kg in Q4FY14. Price of brent crude remained flat QoQ, but increased YoY in INR terms due to INR depreciation.

A&P spend: For the quarter, A&P spend increased 2.3% YoY to INR8,403mn and decreased 78bps YoY to 12.1% as a percentage of sales.

Tax rate: In Q4FY14, effective tax rate for HUL was 26%. The company expects FY15 tax rate to be 250-300bps higher YoY.

Media intensity: Uncertainty remains in the media environment with ad cap regulation coming into play. HUL has also started witnessing the impact of the ad cap regulation by way of media inflation.

7 Edelweiss Securities Limited Consumer Goods

Other expenses: In Q4FY14, gross margin jumped 81bps YoY (net of sales) and increased by 15% YoY to INR10.7bn after Aquagel was made its subsidiary on April 1, 2013. This led to increase in conversion cost. Freight cost also surged due to diesel price increase.

Hindustan Unilever FY14 annual report | Key highlights Volume growth

• The domestic consumer business grew 9% with 4% underlying volume growth surpassing market.

Innovation Most of the company’s product portfolio was innovated/re-innovated. HUL launched a host of innovations across businesses by leveraging Unilever’s global portfolio of brands, research and technology.

• Surf Excel launched the first main-wash liquid detergent in May 2014. • Domex Zero Stain was launched reinstating the cleaning properties of Domex. • Best Ever’ Fair & Lovely • Pond’s BB+ cream • Lakmé CC cream • Healthy White • Hair care and skin care brands were premiumised with Lakmé Pro-Stylist, TRESemmé and Toni&Guy

• Green tea was added to the and Taj Mahal range • Magnum ice cream • Pureit Ultima RO + UV

Distribution

• Extended Perfect Stores programme to one million stores by end 2013. • Added 17,000 plus Shaktiammas in FY14, taking the total count to 65,000. In addition, there are also 50,000 Shaktimaans.

Home & personal care (HPC)

• Rural continued to be a key focus area in HPC - demonstrated benefits and usage of new and emerging categories, such as facewash, hair conditioners and fabric conditioners.

Soaps and detergents

• Segment delivered healthy volume, led by 8% YoY growth; segment profit increased 10.5% YoY owing to mix of cost saving, supply chain efficiencies and judicious pricing.

• Overall, category saw volume decline, but HUL clocked strong volume growth driven by prompt and decisive pricing action on Lifebuoy, , Breeze and Dove, which gained consumer franchise.

8 Edelweiss Securities Limited Hindustan Unilever

• Despite slowing down of category growth rate and rate of premiumisation, HUL’s performance continued to be led by the premium-end of the portfolio.

• Surf continued to lead category premiumisation with double-digit growth. • Rin’s performance was led by the bars portfolio, while powders were re-launched towards year end.

• HUL initiated creation of the detergent liquid market in India with the launch of Surf Excel Detergent Liquid.

Household care

• The category delivered double-digit YoY growth on robust volumes. • Vim crossed the INR10bn revenue mark. • Strengthened its presence across key price points in dish-wash bars which helped reach new consumers in rural India.

Personal products

• The segment clocked 9.2% YoY sales growth with 6.1% YoY growth in profit. • Skincare

o The category registered good growth in a slowing market. o Fair & Lovely (FAL) was re-launched with a new mix - the ‘Best Ever’ Fair & Lovely o Post re-launch, FAL witnessed step-up in growth trajectory. o Vaseline Healthy White posted double-digit growth. • Hair care

o Segment delivered volume-led double digit growth. o TRESemmé is close to becoming an INR1bn brand in the first full year post launch. o HUL launched Toni&Guy through e-commerce (first launch via this route). • Oral care

o There was significant step up in investments in oral care due to dramatic rise in competitive intensity.

• Deodorant

o The company currently imports large portion of deodorants in aerosol form. Unilever is in the process of implementing a project to set up a world class deodorants manufacturing facility in India, which will supply high-quality deodorant products and service markets across the world, including India.

• Colour cosmetics

o Lakmé Colours posted high double-digit growth. o This premium segment’s contribution to makeup has grown particularly well in the past two years.

9 Edelweiss Securities Limited Consumer Goods

Food & beverages (F&B)

• The F&B business delivered strong double-digit growth amidst tough environment. • Beverages

o Segment delivered 12.4% YoY growth well ahead of market on strong double-digit performance in tea.

o Segmental profits increased by 22.4%. o At the onset of the year, the Packet Tea market witnessed steep commodity inflation which drove market volume decline.

o However, HULs’ double-digit growth across brands was driven by a strengthened mix and focused in-market activities.

o All five tea brands recorded healthy volume growth. o Taj Mahal and 3 Roses continued to drive premiumisation. o Red Label and Taaza offered unbranded tea users a good mix of superior, great tasting tea and value.

o Taj Mahal and Lipton continued to grow the tea bags market through market development.

• Packaged foods

o Segment delivered 10% YoY growth with 65.5% YoY growth in profit. o Kissan registered strong double-digit growth. o Knorr’s performance was led by soups with the convenient instant soups single serve format doing particularly well.

o HUL has invested in ‘cup-a-soup’ range, re-staged Knorr Soupy Noodles and re- launched Knorr Meal Maker.

o Modern Foods delivered strong double-digit growth with improved profitability led by step-up in the distribution network.

• Frozen desserts

o Business faced a challenging external environment with slowing discretionary spend and a shorter season.

o Cornetto grew ahead of market on distribution and strong communication. o Modern Trade’s performance was very good in ice creams as HUL strengthened its position in this key channel.

Exports

• FMCG exports:

o HPC witnessed a stable year, driven primarily by soaps and hair care. o Brands like Pears registered healthy growth in the UK market.

o For Unilever sourcing countries, Lifebuoy delivered double-digit growth post its launch across Asian markets.

10 Edelweiss Securities Limited Hindustan Unilever

o FAL and Vaseline Jelly continued stable growth in the key geographies of the Middle East.

o The F&B segment witnessed modest growth. o Instant tea/packet tea and premix witnessed strong double-digit growth, whereas coffee sales remained steady.

• Non-FMCG exports: Rice maintained flat performance. • Leather business: Performed well with improved operating profitability and robust double-digit sales growth.

HUL analyst meet | Key takeaways • Rural India presents huge growth opportunity, as despite having 2x population that in urban areas per capita, GDP is one-third that in urban areas

• Central India with 40% of population holds huge growth potential (can grow 1.75x GDP).

• HUL currently has 65,000 Shaktiammas and 50,000 Shaktimaans. • 11 brands are INR10bn plus and eight are INR5bn plus in terms of sales. • 60% of the portfolio innovated in FY14. • HUL has increased its direct coverage from 0.9mn in FY09 to 3.2mn in FY14 (2mn in FY13).

• Its total coverage is 10.2mn. • Next two year target is to increase throughputs in rural areas rather than further increase penetration (as cost increases as penetration rises).

• Non-TV media

o It is becoming increasingly important, currently forming 25% of the pie. o Digital share has increased from single-digit to double-digit now. o Mobile has 86% penetration; 200mn mobile users do not have access to TV thus increasing importance of non-TV media.

o HUL started Kankhajura Tesan (KKT) channel (mobile entertainment medium for rural folk mainly relevant in Bihar and Jharkhand) in Hindi-speaking regions, whereby HUL is promoting newer categories like hair conditioner, face wash, etc. There are 12mn unique users of KKT in Bihar and Jharkhand. Bihar has TV reach of 23mn, while mobile reach is 54mn.

o KKT has penetration of 60%. o Cost per contact is less than 4cents for KKT (in line with other non-TV media). o For metro-centric brands, non-TV media is more effective. o Sampling is a very effective medium – Kissan tied up with Spice Jet, PVR and passport seva kendras.

o Digital is the key focus area in urban areas.

11 Edelweiss Securities Limited Consumer Goods

• Perfect villages

o Currently there are 8,500 villages (constituting 17% of GDP). o Perfect villages are aimed at creating awareness of new categories. • Personal care

o HUL is focused on scaling up in the deodorants space. o TRESemmé achieved INR1bn sales in first year of launch. o Lakme is fastest growing personal care brand (37% in FY14) with market share of 30% plus.

o Hair conditioner consumption in Philippines is 40x of that in India. o Margins in personal care to benefit from mix improvement, pricing and cost saving. o Male grooming is a big opportunity with facial cleansing as current focus. • Foods

o HUL does not want to compete in commodities business in foods, which despite having high turnover lacks sustainability.

o Kissan ketchup has 21% market share; posted double-digit growth in FY14, growing at 20% plus in H2FY14. Potential for ketchup is still huge, given that per capita consumption per household is still only 1.3kg.

o Magnum has been launched in five cities. It is available at 10% of the Kwality Walls outlets (30,000) and some premium bakeries, etc. HUL will launch mini-Magnum targeting in-house consumption.

o HUL will likely launch a mix of margarine and butter, which is a hit globally. o Ice cream per capita consumption is less than 200ml (globally 20L), presenting huge growth opportunity.

• HUL is focusing on market development and not increasing its market share in slow- growing categories.

• Material savings have improved 26% from 2011 to 2013, while other costs have reduced 9% over the period.

• HUL can consider acquisitions if it is a strategic fit in core categories (will help build portfolio or scale up in the category).

• The company is focusing on driving growth by engaging more users, creating more usage (Lifebuoy, FAL – encouraging thrice a week use from twice a week now, eg., the iconic kajal range in Lakme) and delivering more benefits.

Harish Manwani | Unilever

• Unilever has 14 brands of Euro1bn size • From 2008 to 2013 Unilever invested ~Euro2bn towards A&P.

• India and Brazil are two focus markets for Unilever. • Total number of stores has grown from 4mn to 8mn from 2008 to 2013 led by India (mainly rural).

12 Edelweiss Securities Limited Hindustan Unilever

• Total number of perfect stores has increased from zero in 2009 to 7mn now. • On-shelf availability of products has improved 900bps from 2008 to 2013. • 100% palm oil and 48% agri produce is sourced sustainably. • Lifebouy sales doubled over the past few years; success conveys Unilever Sustainable Living Plan (USLP) most effectively.

• Unilever continues to focus on premium products – acquired luxury skin care brand, IOMA (Paris), mustard (salad dressings) and Regenerate Enamel Science Advanced Toothpaste (oral care).

• Unilever’s key pillars include:

o Innovation – from earlier less-than 10 projects going global, now 70-80 projects are taken global.

o New growth opportunity – Africa (per capita consumption is Euro1 against Unilever’s average Euro6 and Euro20 for Brazil) and Myanmar (Unilever was the first one to get in and also to get out of the 20mn population market due to political issues) are two areas holding humungous growth potential; looking at expanding chemist channel and out of home consumption (ice-cream and tea) meaningfully; exploring e-commerce in a big way.

o Simplification and agility: Targets 30 SKU reduction, marketing fit to win, enterprise technological solution to save Euro500mn.

o Fuel for growth: Focusing on water (acquired Chinuan in China). • Developing and emerging market growth still intact with 1.3bn new consumers to enter by 2020, led by developing markets.

• Personal care per capita consumption is very low in developing markets, providing huge growth potential. For instance, per capita ice-cream consumption in Russia is 15x that of Indonesia, and Thailand’s per capita consumption of body lotion is 13x that of India.

• Unilever intends to: (i) deepen penetration; (ii) straddle the price pyramid; and (iii) leverage global presence with local relevance.

ITC overtook HUL in the deodorant market • ITC, in its first success in the personal care space, beat HUL’s Axe in terms of volume market share.

• ITC has already exhibited its metal in the foods space (ITC beat HUL in food sales in FY13 and now the gap has further widened; details below).

• ITC’s FMCG business grew 16% YoY in FY14 with first year of profit (EBIT of INR220mn).

Table 1: Market share in deodorant segment Brand Company Volume Market share Value market share Fogg Vini cosmetics 12.5 17.8 Engage ITC 8.1 6.6 Wildstone McNROE 6.9 6.7 Axe HUL 6.9 6.5

Source: Industry, Edelweiss research

13 Edelweiss Securities Limited Consumer Goods

TRESemmé crosses INR1bn sales mark HUL’s brand TRESemmé crossed INR1bn sales mark within a year of launch. The company used actor and model, Diana Penty along with international hair stylist, Marcus Francis, in the ads to drive home the brand's association with style and fashion. It was also backed up with an aggressive digital marketing push, in a bid to tap the urban consumer.

Outlook and valuations: Cautious; maintain ‘REDUCE’ We remain positive on HUL from longer term perspective as volumes and margins exhibit improvement due to initiatives in distribution expansion and product innovations in spite of intense competitive landscape in most of the segments. Margins have seen improvement despite higher royalty (up by 50 bps) due to (i) lower media intensity and (ii) cost savings on supply chain front. In our view, sustainability of volume growth and margins remain key monitorables and re-rating of HUL from these levels will depend on these two factors.

With an anticipated recovery in urban demand and a strong innovation pipeline benefitted by strong back-up from the parent entity, we expect HUL to potentially benefit. Hence we marginally increase target P/E multiple to 30x FY16E EPS arriving at a target price of INR637. Recent run up in the stock largely factors in the Q1FY15 beat. On valuations we maintain ‘REDUCE’ on the stock and rate it ‘Sector Underperformer’ on a relative return basis.

Chart 1: Overall volume growth at 6% YoY 17.0

13.6

10.2 (%) 6.8

3.4

0.0

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Source: Company, Edelweiss research

14 Edelweiss Securities Limited Hindustan Unilever

Chart 2: Media intensity has come off though competitive pressure continues 17.5

14.0

10.5

7.0 (% of sales) of (%

3.5

0.0 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15

Chart 3: Category-wise contribution—Sales Q1FY15 revenues Others Q1FY14revenues Others (includes (includes Chemicals, Packaged Chemicals, Water etc) Packaged Food Water etc) 4% 7% Food 4% 7% Beverages 11% Beverages 11% Soaps and Soaps and Detergents Detergents 50% 50% Personal Personal Products Products 28% 28%

Chart 4: Category-wise contribution—EBIT Q1FY15 - EBIT contribution Q1FY14 - EBIT contribution Others Others Packaged (includes (includes Food Packaged Chemicals, Chemicals, 4% Water etc) Food 4% Water etc) Beverages -1% 0% 10% Beverages Soaps and 13% Detergents 40% Soaps and Detergents 40% Personal Personal Products Products 45% 43%

Source: Company, Edelweiss research

15 Edelweiss Securities Limited Consumer Goods

Chart 5: S&D YoY revenue growth robust Chart 6: S&D margin expanded 93bps YoY 30.0 15.0

24.0 12.0

18.0 9.0

12.0 6.0 (S&D margins %) (S&D sales growth %) 6.0 3.0

0.0 0.0 10 11 12 13 10 11 12 13 11 12 13 14 11 12 13 14 10 11 12 13 10 11 12 11 12 13 14 11 12 13 14 ------13 13 ------Jun Jun Jun Jun Sep Sep Sep Sep Jun Jun Jun Jun Dec Dec Dec Dec Sep Sep Sep Dec Dec Dec Dec Mar Mar Mar Mar Mar Mar Mar Mar Sep

Chart 7: PP revenue growth YoY highest in past 8 quarters Chart 8: PP margin expanded 277bps YoY 22.0 35.0

17.6 28.0

13.2 21.0

8.8 14.0 (PP margins %) margins (PP (PP sales growth %) 4.4 7.0

0.0 0.0 10 11 12 13 10 11 12 11 13 14 12 11 12 13 14 10 11 12 13 11 12 13 14 11 12 13 14 10 11 12 13 13 13 ------Jun Jun Jun Jun Jun Jun Jun Jun Sep Sep Sep Dec Dec Dec Dec Sep Sep Sep Sep Mar Mar Mar Mar Dec Dec Dec Dec Mar Mar Mar Mar Sep

Chart 9: Beverages sales robust Chart 10: Beverages margin contracted 202bps YoY 20.0 20.0

16.0 16.0

12.0 12.0

8.0 8.0

4.0 %) margins (Beverages 4.0 (Beverages sales growth %) growth sales (Beverages

0.0 0.0 10 11 12 13 10 11 12 13 11 12 13 14 11 12 13 14 10 11 12 11 12 13 14 11 12 13 14 10 11 12 13 - - - - 13 13 ------Jun Jun Jun Jun Jun Jun Jun Jun Sep Sep Sep Sep Dec Dec Dec Dec Sep Sep Sep Dec Dec Dec Dec Mar Mar Mar Mar Mar Mar Mar Mar Sep

Source: Company, Edelweiss research

16 Edelweiss Securities Limited Hindustan Unilever

Chart 11: PF sales growth highest in past 11 quarters Chart 12: Packaged food expanded 247bps YoY 30.0 12.0

24.0 8.0

18.0 4.0

12.0 0.0

6.0 (4.0) (PPackaged Food margins %) (Packaged Food sales growth %) 0.0 (8.0) 10 11 12 13 10 11 12 11 12 13 14 11 12 13 14 10 11 12 13 11 12 13 14 11 12 13 14 10 11 12 13 13 13 ------Jun Jun Jun Jun Jun Jun Jun Jun Sep Sep Sep Sep Sep Sep Sep Dec Dec Dec Dec Dec Dec Dec Dec Mar Mar Mar Mar Mar Mar Mar Mar Sep

Source: Company, Edelweiss research

Chart 13: Palm oil prices trend 4,000

3,500

3,000

2,500 (MYR/MT)

2,000

1,500 09 10 11 12 13 14 10 11 12 13 14 ------Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan

Source: Company, Edelweiss research

17 Edelweiss Securities Limited Consumer Goods

Table 2: Segmental performance Year to March - Revenues (INR mn) Q1FY15 Q1FY14 YoY growth Q4FY14 QoQ growth Soaps and Detergents 38,476 34,077 12.9 34,971 10.0 Personal products 21,596 18,834 14.7 19,833 8.9 Beverages 8,366 7,574 10.5 8,690 (3.7) Packaged food 5,438 4,579 18.8 4,197 29.6 Others (includes chemicals, water etc) 3,029 2,791 8.5 2,958 2.4 Segment results (Profit/(Loss) before tax and interest) Soaps and Detergents 5,318 4,393 21.1 4,217 26.1 Personal products 5,967 4,682 27.4 4,958 20.3 Beverages 1,363 1,387 (1.8) 1,630 (16.4) Packaged food 591 384 53.8 230 157.2 Others (includes chemicals, water etc) (155) (31) NM (251) NM Segment margins Margin (%) Soaps and Detergents 13.8 12.9 93 12.1 176 Personal products 27.6 24.9 277 25.0 263 Beverages 16.3 18.3 (202) 18.8 (247) Packaged food 10.9 8.4 247 5.5 539 Others (includes chemicals, water etc) (5.1) (1.1) NM (8.5) NM

Source: Company, Edelweiss research

Chart 15: One year forward P/E chart 750 40x 600 35x 30x

450 25x

20x (INR) 300 15x 150

0 07 08 09 10 11 12 13 14 07 08 09 10 11 12 13 ------Jun Jun Jun Jun Jun Jun Jun Jun Dec Dec Dec Dec Dec Dec Dec

Source: Company, Edelweiss research

18 Edelweiss Securities Limited Hindustan Unilever

Financial snapshot (INR mn) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Net revenues 77,163 68,090 13.3 70,941 8.8 292,333 329,632 371,785 Cost of goods sold 39,896 34,828 14.6 37,308 6.9 148,691 168,680 190,482 Gross profit 37,267 33,262 12.0 33,633 10.8 143,641 160,952 181,303 Staff costs 3,357 3,417 (1.8) 3,783 (11.3) 15,758 17,470 19,705 Advt. sales & promotions 9,449 8,898 6.2 8,403 12.4 36,747 40,545 45,730 Other expenses 11,296 10,092 11.9 10,671 5.9 43,720 48,126 55,024 EBITDA 13,165 10,856 21.3 10,776 22.2 47,417 54,811 60,845 Depreciation & amortization 667 664 0.4 658 1.4 2,955 3,029 3,120 EBIT 12,498 10,192 22.6 10,118 23.5 44,461 51,781 57,725 Interest 63 62 0.5 53 17.3 407 435 385 Other income 2,021 1,768 14.3 1,506 34.2 5,710 6,960 7,506 Profit before tax 14,457 11,897 21.5 11,571 24.9 49,764 58,307 64,846 Provision for taxes 4,285 3,046 40.7 3,251 31.8 12,594 16,909 18,805 Core profit 10,172 8,851 14.9 8,320 22.3 37,170 41,398 46,040 Extraordinary items 396 1,342 (70.5) 401 (1.2) 2,387 396 - Net profit 10,569 10,193 3.7 8,721 21.2 39,456 41,670 45,915 Adj. EPS (INR) 4.7 4.1 3.8 17.1 19.1 21.2

As % of net revenues COGS 52.7 52.1 53.8 52.1 52.4 52.5 Employee cost 4.4 5.1 5.5 5.5 5.4 5.4 Adv. & sales promotions 12.5 13.3 12.1 12.9 12.6 12.6 Other expenditure 14.9 15.1 15.4 15.3 15.0 15.2 EBITDA 17.4 16.2 15.5 16.6 17.0 16.8 EBIT 16.5 15.2 14.6 15.6 16.1 15.9 PBT 19.1 17.8 16.7 17.4 18.1 17.9 Reported net profit 14.0 15.2 12.6 13.8 12.9 12.6 Tax rate 29.6 25.6 28.1 25.3 29.0 29.0

19 Edelweiss Securities Limited Consumer Goods

Company Description HUL, the largest FMCG Company in India, was formed by merging three subsidiaries of Unilever in 1956. At present, Unilever Plc holds a 67.3% stake in the company. HUL’s portfolio of products covers a wide spectrum including soaps, detergents, skin creams, shampoos, toothpastes, tea, coffee, packaged foods and branded atta.

Powerful brands and an envious distribution network are HUL’s primary strengths. The company operates through segments—soaps & detergents, personal products, beverages, foods, exports, and other operations.

Investment Theme HUL is a play on consumption growth in India. The company has displayed its ability to effect price hikes and avoid impact of inflation in vegetable oils, which, combined with improved outlook for S&D and personal care, and strong growth in processed foods and beverages, boosts our positive outlook on the company. We like its revenue growth from a medium to long term perspective, however increase in royalty, steep hike in tax rate and slowdown in discretionary segments remains an overhang and thus limit near term upside. Post partial success of Unilever’s open offer to raise its stake in HUL the parent’s stake stands at 67.3% of the total shareholding.

Key Risks Depreciation in rupee impacts price of imported raw materials.

A rise in crude oil prices can impact packaging costs and indirectly / directly impact palm oil and LAB prices which are used in soaps and detergents respectively.

The price war in HUL’s popular segments with new entrants entering the fray could hit the company hard.

20 Edelweiss Securities Limited Hindustan Unilever

Financial Statements

Key Assumptions Income statement (INR mn) Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E Macro Net revenue 263,172 285,390 321,786 363,155 GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Other Operating Income 6,868 6,943 7,846 8,630 Inflation (Avg) 7.4 6.2 5.5 6.0 Total operating income 270,040 292,333 329,632 371,785 Repo rate (exit rate) 7.5 8.0 7.8 7.3 Materials costs 140,871 148,691 168,680 190,482 USD/INR (Avg) 54.5 60.5 58.0 56.0 Gross profit 129,169 143,641 160,952 181,303 Company Employee costs 14,127 15,758 17,470 19,705 Volume gr. (overall) 7.0 4.0 7.0 7.0 Other Expenses 40,089 43,720 48,126 55,024 Pricing gr. (overall) 7.5 4.4 5.8 5.9 Advertisement & sales costs 32,900 36,747 40,545 45,730 Growth in Soaps 24.6 6.2 8.0 10.0 EBITDA 42,053 47,417 54,811 60,845 Growth in Detergents 13.1 7.6 12.0 13.0 Depreciation & Amortization 2,513 2,955 3,029 3,120 Growth in PP 7.3 8.9 12.0 14.0 EBIT 39,540 44,461 51,781 57,725 Growth in beverages 13.6 11.3 10.0 12.0 Other income 5,320 5,710 6,960 7,506 Growth in packaged foods 10.8 9.5 15.0 17.0 Interest expenses 257 407 435 385 EBITDA margin (%) 16.0 16.6 17.0 16.8 Profit before tax 44,603 49,764 58,307 64,846 EBITDA margin assumptions Provision for tax 12,267 12,594 16,909 18,805 Oils, fats and resins as % of COGS 11.5 11.5 11.5 11.3 Net profit 32,337 37,170 41,398 46,040 Chemicals and perfumes as % of COGS 32.7 32.9 30.2 30.0 Prior period adjustments (net) 6,057 2,387 396 - Tea and Green leaf as % of COGS 8.4 9.0 6.8 6.8 Minority interest (104) (102) (124) (125) Selling and distribution costs 14.8 15.0 14.6 14.8 Profit after minority interest 38,290 39,456 41,670 45,915 A&P as % of sales 12.5 12.9 12.6 12.6 Diluted EPS (INR) 14.9 17.1 19.1 21.2 Employee cost as % of sales 5.4 5.5 5.4 5.4 Dividend per share (INR) 18.5 13.0 13.7 15.1 Financial assumptions Dividend payout (%) 104.5 71.3 71.3 71.3 Tax rate (%) 27.5 25.3 29.0 29.0

Capex (INR mn) 3,566 5,800 3,424 4,500 Common size metrics Debtor days 13 13 14 14 Year to March FY13 FY14 FY15E FY16E Inventory days 70 69 75 75 Materials costs 53.5 52.1 52.4 52.5 Payable days 132 139 140 140 Employee expenses 5.4 5.5 5.4 5.4 Cash conversion cycle (days) (50) (57) (51) (51) Advertising & sales costs 12.5 12.9 12.6 12.6 Depreciation as % of gross block 5.9 6.3 5.8 5.5 Interest expenditure 0.1 0.1 0.1 0.1 Yield on cash 12.8 10.7 13.0 13.0 EBITDA margins 16.0 16.6 17.0 16.8 Net profit margins 12.3 13.0 12.9 12.7

Growth ratios (%) Year to March FY13 FY14 FY15E FY16E Revenues 14.5 8.4 12.8 12.9 EBITDA 20.7 12.8 15.6 11.0 Net profit 20.4 14.9 11.4 11.2 EPS 20.4 15.0 11.3 11.2

21 Edelweiss Securities Limited Consumer Goods

Balance sheet (INR mn) Cash flow metrics As on 31st March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E Equity capital 2,163 2,163 2,163 2,163 Operating cash flow 34,948 37,644 42,318 51,811 Reserves & surplus 26,485 33,210 40,223 47,950 Investing cash flow 631 (4,750) (3,424) (4,500) Shareholders funds 28,648 35,373 42,386 50,113 Financing cash flow (41,474) (29,603) (34,696) (38,573) Minority interest (BS) 209 223 346 472 Net cash flow (5,896) 3,291 4,197 8,738 Borrowings 247 456 456 456 Capex (3,566) (5,800) (3,424) (4,500) Deferred tax liability (2,085) (1,796) (1,796) (1,796) Dividends paid (46,654) (32,816) (34,657) (38,188) Sources of funds 27,019 34,256 41,392 49,245

Tangible assets 23,953 26,409 27,880 29,260 Profitability & efficiency ratios Intangible assets 361 241 241 241 Year to March FY13 FY14 FY15E FY16E CWIP (incl. intangible) 2,224 3,726 2,650 2,650 ROAE (%) 98.5 115.8 106.2 99.3 Total net fixed assets 26,539 30,377 30,771 32,151 ROACE (%) 489.1 857.5 548.4 340.8 Goodwill on consolidation - 812 812 812 Inventory day 70 69 75 75 Non current investments 3,953 3,802 3,802 3,802 Debtors days 13 13 14 14 Current Investments 18,570 24,580 24,580 24,580 Payable days 132 139 140 140 Cash and equivalents 19,007 25,160 29,358 38,096 Cash conversion cycle (days) (50) (57) (51) (51) Inventories 27,060 29,398 34,660 39,140 Current ratio 1.0 1.0 1.1 1.1 Sundry debtors 9,965 10,311 12,643 14,260 Debt/EBITDA - - - - Loans and advances 10,036 10,650 10,650 10,650 Debt/Equity - - - - Other current assets 3,703 808 808 808 Interest coverage 153.7 109.3 119.0 149.9 Total current assets (ex cash) 50,764 51,168 58,762 64,859

Trade payable 53,417 59,649 64,699 73,062 Operating ratios Others current liabilities 38,397 41,993 41,993 41,993 Year to March FY13 FY14 FY15E FY16E Total current liabilities & 91,815 101,642 106,692 115,054 Total asset turnover 8.5 9.3 8.5 8.0 Net current assets (ex cash) (41,051) (50,474) (47,930) (50,196) Fixed asset turnover 11.2 11.2 11.8 12.6 Uses of funds 27,019 34,256 41,392 49,245 Equity turnover 8.0 8.9 8.3 7.9 Book value per share (INR) 12.5 15.8 19.1 22.8

Valuation parameters

Free cash flow (INR mn) Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E Diluted EPS (INR) 14.9 17.1 19.1 21.2 Net profit 38,290 39,456 41,670 45,915 Y-o-Y growth (%) 20.4 15.0 11.3 11.2 Add : Non cash charge (6,537) (5,359) 3,192 3,630 CEPS (INR) 16.1 18.6 20.5 22.7 Gross cash flow 31,753 34,097 44,862 49,545 Diluted PE (x) 46.1 40.1 36.0 32.4 Less: Changes in WC (3,195) (3,547) 2,544 (2,266) Price/BV (x) 55.0 43.4 35.9 30.2 Operating cash flow 34,948 37,644 42,318 51,811 EV/Sales (x) 5.5 5.0 4.4 3.9 Less: Capex 3,566 5,800 3,424 4,500 EV/EBITDA (x) 34.4 30.3 26.1 23.4 Free cash flow 31,382 31,845 38,894 47,311 Dividend yield (%) 2.7 1.9 2.0 2.2

Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E Hindustan Unilever 24,706 36.0 32.4 26.1 23.4 106.2 99.3 ITC 47,293 28.2 24.8 18.3 15.9 35.0 35.9 Colgate 3,597 39.1 33.6 27.0 23.2 87.3 91.1 Dabur 5,781 32.7 27.6 25.0 20.8 35.4 34.1 Emami 2,053 28.3 24.5 24.7 20.9 40.0 36.9 GlaxoSmithKline Consumer Healthcare 3,393 33.4 28.4 22.2 18.6 30.9 30.8 Godrej Consumer 4,918 32.4 26.4 22.4 18.6 22.3 23.5 Marico 2,684 27.5 22.7 17.5 14.3 22.0 21.9 Nestle Ltd 8,316 39.2 33.4 22.6 19.3 47.3 44.0 AVERAGE - 31.9 27.3 22.1 18.8 45.4 44.6 Source: Edelweiss research

22 Edelweiss Securities Limited Hindustan Unilever

Additional Data Directors Data Mr. Harish Manwani Chairman Mr. Sanjiv Mehta Managing Director and Chief Executive Officer Mr. Sridhar Ramamurthy Executive Director, Finance & IT and Chief Financial Officer Mr. Pradeep Banerjee Executive Director, Supply Chain Mr. A. Narayan Independent Director Mr. S. Ramadorai Independent Director Mr. R. A. Mashelkar Independent Director Mr. O. P. Bhatt Independent Director Dr. Sanjiv Misra Independent Director

Auditors - M/s. Lovelock & Lewes *

Holding – Top10 Perc. Holding Perc. Holding Aberdeen Asset Management Plc 3.1 Harris Trust & Savings Bank 0.9 Vanguard Group Inc 0.9 Vontobel Asset Management Ag 0.7 Blackrock Fund Advisors 0.6 Oppenheimerfunds Incorporated 0.4 Sbi Life Insurance Co Ltd 0.2 Fidelity International 0.2 Emerging Global Shares 0.2 Blackstone Asia Advisors Llc 0.2 *as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

23 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Asian Paints BUY SO M Bajaj Corp HOLD SU H Colgate HOLD SP M Dabur BUY SO M Emami BUY SP H GlaxoSmithKline Consumer HOLD SP M Healthcare Godrej Consumer BUY SP H Hindustan Unilever REDUCE SU L ITC BUY SO L Marico BUY SO M Nestle Ltd HOLD SU L Pidilite Industries BUY SO M United Spirits BUY SP H

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

24 Edelweiss Securities Limited Hindustan Unilever

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206 Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Recent Research

Date Company Title Price (INR) Recos

29 -Jul-14 Dabur Inida Volume growth resilient 198 Buy despite slowdown; Result Update 25-Jul-14 Colgate Position unchallenged; 1,637 Hold Palmolive Result Update 23-Jul-14 Asian Line by line beat; 604 Buy Paints Result Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 151 44 9 205 Buy appreciate more than 15% over a 12-month period * 1 stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 144 56 5

25 Edelweiss Securities Limited

Consumer Goods

DISCLAIMER

General Disclaimer: This report has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should inform themselves about and observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information provided in these reports remains, unless otherwise stated, the copyright of Edelweiss. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright Edelweiss and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Analyst holding in the stock: No.

Edelweiss shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the Edelweiss to present the data. In no event shall the Edelweiss be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the Edelweiss through this presentation.

26 Edelweiss Securities Limited

Hindustan Unilever

Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Enclave Capital, LLC ("Enclave"). Transactions in securities discussed in this research report should be effected through Enclave Capital, LLC. Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person. Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst. This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person. ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.

Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Access the entire repository of Edelweiss Research on www.edelresearch.com

27 Edelweiss Securities Limited