Hindustan Unilever
“Re‐Imagining” for a long haul ; Accumulate
June 06, 2018 We attended the Annual Investor Day of HUL and came back positive on the sustainability of growth led by “Re‐Imagining HUL”. HUL is creating building blocks
Amnish Aggarwal for the future which include 1) Premiumisation and upgradation 2) Organisation [email protected] culture and structure with young leaders 3) strengthening the core portfolio 4) +91‐22‐66322233 market development for emerging segments 5) sustained expansion of naturals Update
portfolio 6) efficiencies in supply chain and distribution and 7) driving cost savings Nishita Doshi to fuel growth. HUL is extensively using digital in mapping consumers, innovations, [email protected] communication and marketing which will enable HUL to grow ahead of the market
+91‐22‐66322381 Meet and gain share.
Rating Accumulate HUL is upping the ante in innovations and launches like Pure Derm, Indulekha Price Rs1,573 Shampoo, Bru Coffee for Karnataka, Lifebuoy Haldi, Ayush Breakfast Cereals, Target Price Rs1,627 Italian Noodles, Kwality Walls Sandwich ice cream, Hamam Neem etc. which will Analyst Implied Upside 3.4% enable the company accelerate growth. Market development in categories of Sensex 35,179 Future like Fabric Conditioners, Body Lotion, Anti‐ Perspirants, Hair conditioners, Nifty 10,685 hand wash, liquid dish wash, toilet cleaners, face wash, Green tea etc. will make them as major drivers in coming years. HUL will have distinct advantage as it has (Prices as on June 06, 2018) higher share in premium segments, modern trade and E‐commerce and emerging categories. Trading data Market Cap. (Rs bn) 3,397.2 HUL has increased cost savings from 3% of sales to 6‐7% in the past 6 years and Shares o/s (m) 2,160.0 expects to sustain the gains by 1) targeted use of digital in mapping and targeting 3M Avg. Daily value (Rs m) 1709.9 consumers 2) efficiencies in supply chain 3) reduction in delivery time to retailers Major shareholders from 40 hours to 18 hours under project Shogun and 4) product development to fit Promoters 67.19% the WIMI strategy. Foreign 12.56% We remain positive on the long term structural story and HUL’s ability to gain Domestic Inst. 6.85% from the same. We estimate 18.8% PAT CAGR over FY18‐20 and value the stock at Public & Other 13.39% 45xSept20EPS thus assigning a price target of Rs1627 (Rs1555, 43xSept 18 earlier). Stock Performance We retain Accumulate rating on the stock, however we expect back ended returns (%) 1M 6M 12M post 43% appreciation in past 1 year. Absolute 7.4 23.5 43.9 Key financials (Y/e March) 2017 2018 2019E 2020E Relative 6.6 15.5 31.1 Revenues (Rs m) 344,870 352,180 386,876 431,531 How we differ from Consensus Growth (%) 3.0 2.1 9.9 11.5 EPS (Rs) PL Cons. % Diff. EBITDA (Rs m) 60,470 72,760 86,036 102,409 2019 28.0 28.8 ‐2.8 PAT (Rs m) 42,490 51,359 60,706 72,542 2020 33.4 34.1 ‐2.0 EPS (Rs) 19.7 23.8 28.0 33.4 Growth (%) 1.9 20.9 17.7 19.5 Price Performance (RIC: HLL.BO, BB: HUVR IN) Net DPS (Rs) 16.5 18.0 22.0 24.0 (Rs) 1,800 Profitability & Valuation 2017 2018 2019E 2020E 1,600 1,400 EBITDA margin (%) 17.5 20.7 22.2 23.7 1,200 RoE (%) 66.6 75.7 83.1 89.5 1,000 800 RoCE (%) 62.1 69.6 76.0 82.0 600 EV / sales (x) 9.8 9.6 8.7 7.8 400 200 EV / EBITDA (x) 56.0 46.2 39.3 32.9 0 PE (x) 80.0 66.1 56.2 47.0 17 18 17 17 18 18 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ P / BV (x) 52.3 48.0 45.3 39.3 Jun Jun Oct Apr Feb Dec Aug Net dividend yield (%) 1.1 1.1 1.4 1.5
Source: Bloomberg Source: Company Data; PL Research
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: HUVR is Re‐imagining strategy to align to changing digital, consumer and distribution paradigm
Source: Company Data
Exhibit 2: HUVR is customising products, media and marketing to cater to 14 different clusters across country
Source: Company Data
Exhibit 3: HUVR is creating Mini boards so that Management time is focused on LONG TERM GOALS
Source: Company Data
June 06, 2018 2
Hindustan Unilever
Exhibit 4: Strengthen the CORE of portfolio to grow
Source: Company Data
Exhibit 5: Invest in Categories of FUTURE which will scale up in coming years
Source: Company Data
Exhibit 6: Build NATURALS portfolio, Indulekha Shampoo, Close UP, Lifebuoy Haldi, Ayush Breakfast Cereals
Source: Company Data
June 06, 2018 3
Hindustan Unilever
Exhibit 7: GENERAL TRADE will remain important, focus on improving coverage and assortment
Source: Company Data
Exhibit 8: Project SHOGUN; cut delivery time to retailer from 40hours to 18 hours, reduce distribution costs
Source: Company Data
Exhibit 9: Increased savings from 3% to 6‐7% of sales to invest for growth, trend to sustain
Source: Company Data
June 06, 2018 4
Hindustan Unilever
Food and refreshments: Ready to step up with Ayush Breakfast Cereals, Kwality Walls and TEA Portfolio
Exhibit 10: HUVR has high share in premium segment of TEA, BRU customised to cater to Kannadiga Taste
Source: Company Data
Exhibit 11: Ayush Entering Breakfast Cereals under AYUSH, Noodles ready for national rollout of Italian flavors
Source: Company Data
Exhibit 12: Kwality Walls: from 40 to 400 Cities; Innovations in Sandwich Ice cream, and Cornetto OREO
Source: Company Data
June 06, 2018 5
Hindustan Unilever
Home Care: Premium Detergents, Vim Key drivers; Toilet Cleaners a potential new growth area
Exhibit 13: Surf Excel drives growth in Detergents; WIMI strategy at Play: UP ; Surf Excel easy wash and RIN, TN: Liquids
Source: Company Data
Exhibit 14: Premium Detergents and fabric conditioners are LONG term growth drivers
Source: Company Data
Exhibit 15: Domex launches powder Toilet Cleaners; seeding categories of FUTURE
Source: Company Data
June 06, 2018 6
Hindustan Unilever
Personal Care: Naturals, Anti Perspirants and Body lotion future growth drivers
Exhibit 16: Premium and Mkt Development key drivers; AXE Ticket to enable entry in LUP in Deo’s
Source: Company Data
Exhibit 17: Rexona to drive anti Perspirants market; BODY Lotion another key focus area
Source: Company Data
Exhibit 18: Naturals: Portfolio strengthened with Indulekha Shampoo, Hamam Neem Soap, Lifebuoy Haldi and lakme naturals
Source: Company Data
June 06, 2018 7
Hindustan Unilever
Exhibit 19: Comparable FMCG sales up 16% Exhibit 20: Volumes up 11% on a low base 17.0 11.0 18.0 16.0 12.0 11.0 16.0 10.0 14.0 8.0 12.0 10.0 6.0 4.0 4.0 4.0 10.0 8.0 4.0 4.0 (%) 8.0 6.0 (%) 2.0 0.0 6.0 4.0 4.0 (1.0) 4.0 2.0 0.0 2.0 0.0 (2.0) (4.0) 0.0 (4.0) (6.0) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
Source: Company Data, PL Research Source: Company Data, PL Research
Exhibit 21: Ad spend up 140bps on increased brand Exhibit 22: GM up 150bps; EBITDA margins up 240bps building Gross Margins (%) EBITDA Margins (%) (RHS) 13.5 12.9 13.0 12.3 56.0 52.6 24.0 12.5 54.0 11.8 22.0 12.0 11.5 52.0 51.0 19.1 20.0 11.2 50.0 20.1 22.5 11.5 10.9 18.0 10.8 48.0 51.2 11.0(%) 10.6 10.4 46.0 16.0 10.5 44.0 14.0 10.0 42.0 12.0 9.5 9.0 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
6 7 7 7 7 8 8 8 8 Q4FY1 Q1FY1 Q2FY1 Q3FY1 Q4FY1 Q1FY1 Q2FY1 Q3FY1 Q4FY1 Source: Company Data, PL Research Source: Company Data, PL Research
Exhibit 23: PFAD prices down 15.3% YoY and 2.2% QoQ Exhibit 24: LAB prices are up 3.9% QoQ and up 7% YoY 140 80.0 YoY QoQ 69.7 130 60.0 120 125.1 40.0 28.7 30.3 110 106 100 20.0 6.7 (%) 3.1 2.7 (Rs/Kg) 90 103.1 104 0.0 80 89.1 ‐20.0 ‐4.4 ‐6.9 70 ‐15.3 ‐18.9‐21.9 60 ‐40.0 ‐27.8‐28.9 13 14 15 16 17 18 12 13 14 15 16 17 13 14 15 16 17 13 14 15 16 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 18 17 16 15 17 16 15 17 16 15 17 16 15 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jun Jun Jun Jun Jun Sep Sep Sep Sep Sep Dec Dec Dec Dec Dec Dec Mar Mar Mar Mar Mar Mar Jun Jun Jun Sep Sep Sep Dec Dec Dec Mar Mar Mar Mar Source: Company Data, PL Research Source :PL Research
June 06, 2018 8
Hindustan Unilever
Exhibit 25: Sales not comparable due to GST, Home care, Personal care and Refreshments see margin expansion Quarterly Segmental 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Net Sales (Rs m) 83,210 87,886 84,700 83,073 88,750 92,130 83,030 85,900 90,970 Home Care 27,980 28,760 27,770 26,891 30,040 30,470 27,390 27,410 31,020 Personal Care 37,700 42,216 40,280 39,802 40,750 43,680 39,100 40,900 40,960 Foods 2,880 2,722 2,778 2,785 2,950 2,840 2,820 3,000 2,990 Refreshments 11,760 12,149 11,692 11,641 13,000 13,460 12,220 12,480 14,090 Others 2,890 2,038 2,181 1,954 2,010 1,680 1,500 2,110 1,910
Sales Growth % 4.4 1.6 (0.8) 6.7 4.8 (2.0) 3.4 2.5 Home Care 8.0 3.2 1.0 7.4 5.9 (1.4) 1.9 3.3 Personal Care 2.7 (0.3) (2.7) 8.1 3.5 (2.9) 2.8 0.5 Foods 5.0 2.4 0.5 2.4 4.3 1.5 7.7 1.4 Refreshments 5.6 8.4 8.1 10.5 10.8 4.5 7.2 8.4 Others (14.3) (15.2) (27.3) (30.4) (17.6) (31.2) 8.0 (5.0)
EBIT (Rs m) 14,514 15,768 13,981 13,359 16,160 18,170 15,560 15,300 18,640 Home Care 3,023 3,559 2,800 2,342 3,890 4,480 3,830 3,540 5,090 Personal Care 9,027 10,214 9,226 9,208 9,840 10,790 9,480 10,070 10,660 Foods 381 170 137 261 280 410 170 110 310 Refreshments 1,943 1,921 1,726 1,713 2,190 2,550 2,140 1,690 2,560 Others 140 ‐95 91 ‐166 ‐40 ‐60 ‐60 ‐110 20
EBIT Growth % 4.7 9.0 (5.5) 11.3 15.2 11.3 14.5 15.3 Home Care 22.7 24.7 (0.6) 28.7 25.9 36.8 51.1 30.8 Personal Care 0.3 3.6 (7.1) 9.0 5.6 2.8 9.4 8.3 Foods (20.7) (16.2) (25.1) (26.5) 141.6 24.0 (57.9) 10.7 Refreshments 7.5 17.5 7.4 12.7 32.8 24.0 (1.3) 16.9 Others 340.5 112.1 159.0 (128.6) (36.6) (165.6) (33.5) (150.0)
EBIT Margin % Home Care 10.8 12.4 10.1 8.7 12.9 14.7 14.0 12.9 16.4 Personal Care 23.9 24.2 22.9 23.1 24.1 24.7 24.2 24.6 26.0 Foods 13.2 6.2 4.9 9.4 9.5 14.4 6.0 3.7 10.4 Refreshments 16.5 15.8 14.8 14.7 16.8 18.9 17.5 13.5 18.2
Source: Company Data, PL Research
June 06, 2018 9
Hindustan Unilever
Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e March 2017 2018 2019E 2020E Y/e March 2017 2018 2019E 2020E Net Revenue 344,870 352,180 386,876 431,531 Shareholder's Funds 64,900 70,751 75,418 86,734 Raw Material Expenses 182,820 169,250 181,167 200,453 Total Debt — — — — Gross Profit 162,050 182,930 205,709 231,078 Other Liabilities 5,740 6,660 7,248 7,880 Employee Cost 16,200 17,450 19,893 22,027 Total Liabilities 70,640 77,411 82,666 94,613 Other Expenses 85,380 92,720 99,780 106,642 Net Fixed Assets 42,270 45,720 43,675 43,384 EBITDA 60,470 72,760 86,036 102,409 Goodwill — — — — Depr. & Amortization 3,960 4,781 5,095 5,440 Investments 42,860 31,110 33,210 43,510 Net Interest 220 200 220 220 Net Current Assets (14,490) 580 5,781 7,719 Other Income 5,260 5,690 6,002 6,882 Cash & Equivalents 11,640 33,730 33,647 39,855 Profit before Tax 61,550 73,469 86,722 103,631 Other Current Assets 50,740 60,930 64,573 70,861 Total Tax 19,060 22,110 26,017 31,089 Current Liabilities 76,870 94,080 92,439 102,997 Profit after Tax 42,490 51,359 60,706 72,542 Other Assets — — — — Ex‐Od items / Min. Int. 4,820 2,023 1,000 1,000 Total Assets 70,640 77,410 82,665 94,613 Adj. PAT 42,490 51,359 60,706 72,542 Avg. Shares O/S (m) 2,160.0 2,160.0 2,170.0 2,170.0 EPS (Rs.) 19.7 23.8 28.0 33.4
Cash Flow Abstract (Rs m) Quarterly Financials (Rs m) Y/e March 2017 2018 2019E 2020E Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 C/F from Operations 54,340 65,260 61,233 82,929 Net Revenue 85,290 83,090 85,900 90,970 C/F from Investing (13,460) (14,440) (4,231) (20,733) EBITDA 18,660 16,820 16,800 20,480 C/F from Financing (42,630) (45,739) (56,166) (61,271) % of revenue 21.9 20.2 19.6 22.5 Inc. / Dec. in Cash (1,750) 5,081 836 924 Depr. & Amortization 1,140 1,150 1,210 1,280 Opening Cash 2,400 650 5,730 6,566 Net Interest 60 60 50 40 Closing Cash 650 5,730 6,566 7,490 Other Income 1,130 2,040 1,520 1,000 FCFF 36,680 57,230 55,517 77,252 Profit before Tax 18,590 17,650 17,060 20,160 FCFE 36,680 57,230 55,517 77,252 Total Tax 5,670 5,290 5,080 6,070 Profit after Tax 12,920 12,360 11,970 13,990 Adj. PAT 12,920 12,360 11,980 14,090
Key Financial Metrics Key Operating Metrics Y/e March 2017 2018 2019E 2020E Y/e March 2017 2018 2019E 2020E Growth Volume Growth % (1.5) 4.9 7.3 7.1 Revenue (%) 3.0 2.1 9.9 11.5 Source: Company Data, PL Research.
EBITDA (%) 5.2 20.3 18.2 19.0 PAT (%) 1.9 20.9 18.2 19.5 EPS (%) 1.9 20.9 17.7 19.5 Profitability EBITDA Margin (%) 17.5 20.7 22.2 23.7 PAT Margin (%) 12.3 14.6 15.7 16.8 RoCE (%) 62.1 69.6 76.0 82.0 RoE (%) 66.6 75.7 83.1 89.5 Balance Sheet Net Debt : Equity (0.2) (0.5) (0.4) (0.5) Net Wrkng Cap. (days) (63) (88) (83) (83) Valuation PER (x) 80.0 66.1 56.2 47.0 P / B (x) 52.3 48.0 45.3 39.3 EV / EBITDA (x) 56.0 46.2 39.3 32.9 EV / Sales (x) 9.8 9.6 8.7 7.8 Earnings Quality Eff. Tax Rate 31.0 30.1 30.0 30.0 Other Inc / PBT 8.5 7.7 6.9 6.6 Eff. Depr. Rate (%) 5.8 6.5 6.5 6.5 FCFE / PAT 86.3 111.4 91.5 106.5 Source: Company Data, PL Research.
June 06, 2018 10
Hindustan Unilever
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐ 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
50% 45.3% BUY : Over 15% Outperformance to Sensex over 12‐months 42.2% Accumulate : Outperformance to Sensex over 12‐months 40% Reduce : Underperformance to Sensex over 12‐months 30% Sell : Over 15% underperformance to Sensex over 12‐months Coverage 20% 12.5% Trading Buy : Over 10% absolute upside in 1‐month Total 10% Trading Sell : Over 10% absolute decline in 1‐month of 0.0%
% Not Rated (NR) : No specific call on the stock 0% BUY Accumulate Reduce Sell Under Review (UR) : Rating likely to change shortly
DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Amnish Aggarwal (MBA, CFA), Ms. Nishita Doshi (CA, CFA Level 1, B.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. 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