Result Update October 27, 2016

Rating matrix Rating : Buy Hindustan (HINLEV) | 840 Target : | 978 Target Period : 12 months Potential Upside : 13% Revival in rural growth may be saviour...

What’s changed? • reported disappointing Q2FY17 results with the Target Changed from | 1000 to | 978 topline merely growing at 1.5% to | 8335.1 crore largely contributed EPS FY17E Changed from | 21.7 to | 20.7 by 3% price hikes. Volumes contracted 1%. Sales growth in home EPS FY18E Changed from | 24.7 to | 24.2 care, foods & refreshments was 3.2%, 2.4%& 8.4% YoY, respectively. Rating Unchanged However, personal care segment revenues remained flat Quarterly performance • EBITDA margin improved 60 bps YoY mainly due to 100 bps dip in Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) marketing expenditure, partly offset by increase in RM cost. The Sales 7697.6 7595.6 1.3 7987.7 -3.6 company has withdrawn most promotional offers during the quarter. EBITDA 1404.6 1336.6 5.1 1635.9 -14.1 With the sharp increase in palm oil & crude prices, raw material to EBITDA % 17.9 17.3 62 bps 20.1 -222 bps sales witnessed ~195 bps increase on a QoQ basis PAT 1095.6 982.2 11.5 1173.9 -6.7 • PAT increased 11.5% YoY to | 1095.6 crore (I-direct estimate: | 1067.7 crore) on the back of higher EBITDA and exceptional gain of Key financials | 20.8 crore mainly due to sale of rice brand. The other income | Crore FY15 FY16 FY17E FY18E increased 30% to | 252.9 crore led by higher dividend income from Revenue 30,171 30,499 32,153 35,818 subsidiary EBITDA 5,208 5,749 6,159 6,943 Net Profit 4,315 4,137 4,486 5,238 Volume growth expected to improve to ~5% by FY17E EPS(|) 19.9 19.1 20.7 24.2 HUL’s volume growth decelerated in line with the economic downturn Adj. EPS(|) 17.8 19.2 20.5 24.2 * from ~13% (FY11) to 5% in FY15, largely on the back of a slowdown in FY16 onwards, financials are reported as per Ind AS urban discretionary demand with rural growth remaining moderate. HUL

witnessed 6% volume growth in FY16. Though the first half of FY17 has Valuation summary seen one of the worst consumer demand in several years, we remain FY15 FY16 FY17E FY18E P/E 43.5 45.4 41.8 35.8 positive on a demand pick-up mainly on account of normal monsoons, Target P/E 49.0 51.2 47.2 40.4 after two consecutive years of deficit rainfall and government thrust to Div. Yield 1.7 1.8 2.0 2.4 increase rural income levels. As the overall economy revives and growth Mcap/Sales 6.2 6.2 5.8 5.2 gains traction, we believe HUL’s strong portfolio of brands across RoNW (%) 103.4 111.1 181.2 219.5 segments would aid volume growth back to ~5%, going forward. RoCE (%) 101.4 106.8 208.0 239.6 Premiumisation to drive home care revenue growth *From FY16 onwards, financials are reported as per Ind AS Home care segment is second highest contributor to HUL’s revenues Stock data (31.1% in FY16) & EBIT (18.6% in FY16). Excel, HUL’s largest brand Particular Amount (>| 3000 crore in FY16), Wheel, Rin are | 2000+ crore brands while Vim Market Capitalization (| Crore) 187,610.1 is | 1000+ crore brand. Surf Excel has been a beneficiary of growing Total Debt (FY16) (| Crore) 0.0 premiumisation trend in the detergents category. We expect home care Cash and Investments (FY16) (| Crore) 5,110.5 revenues to grow at a CAGR of 6.0% in FY16-18E led by improving EV (| Crore) 182,499.6 product mix. 52 week H/L 954 / 765 Equity capital | 216.4 crore Personal care remains key beneficiary of rising income levels Face value | 1 Personal care remains highest contributor to HUL’s revenues (47.9% in FII Holding (%) 14.2 FY16) & EBIT (67.2% in FY16). , Fair & Lovely are | 2000+ crore DII Holding (%) 5.2 brands while , , Clinic Plus, Pond’s are | 1000+ crore brands. We Price performance believe the segment will be a key beneficiary of a revival in discretionary Return %1M3M6M12Mdemand. With the acquisition of Indulekha brand in FY16, HUL seeks to HUL -6.7 -6.0 -4.0 6.1 leverage its strong brand equity to tap the growth across nascent ITC -5.0 -3.4 11.1 1.0 ‘naturals’ segment. We believe, going ahead, HUL’s brand strength would GCPL 0.8 -3.1 16.6 27.1 lead to sales growth to 7% CAGR (FY16-18E) as demand gains traction. Colgate -1.7 0.8 13.2 2.2 Well positioned to capture expected rural demand revival; maintain BUY Research Analyst We have cut our EPS estimates by 4.3% for FY17E & 2.2% for FY18E Sanjay Manyal mainly due to muted volumes performance in personal care segment in [email protected] Q2FY17. However, we remain positive on HUL mainly due to Tejashwini Kumari government’s focus on rural income levels with the allocated ~| 87700 [email protected] crore towards rural development in Budget 2016. Rural sales contribute

~35% to HUL’s sales. We estimate sales growth & profit growth of 8.4% & 12.5% CAGR, respectively, in FY16-18E for HUL. We are changing our

target price from | 1000 /share to | 978 /share with BUY recommendation.

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Variance analysis Q2FY17 Q2FY17E Q2FY16 YoY (%) Q1FY17 QoQ (%) Comments Net Sales 7,697.6 8,084.3 7,595.6 1.3 7,987.7 -3.6 Net sales witnessed a muted 1.3% growth mainly due to 1% volume de-growth & 3% price rise Operating Income 145.1 161.7 135.8 6.9 140.4 3.3

Raw Material Expenses 3,962.0 4,026.4 3,896.5 1.7 3,955.5 0.2 With the increase in palm oil prices, RM to sales increased by ~195 bps sequentially and ~10 bps YoY. Employee Expenses 396.0 412.3 375.4 5.5 426.5 -7.2 Marketing Expenses 851.4 1,131.8 921.0 -7.6 879.8 -3.2 The company reduced marketing spend by 100 bps during the quarter. It has also cut down on promotional offers, which is netted off from sales with the introduction of Ind AS . Other operating expenses 1,228.7 953.9 1,201.8 2.2 1,230.6 -0.2

EBITDA 1,404.6 1,491.1 1,336.6 5.1 1,635.9 -14.1 EBITDA margin (%) 17.9 18.1 17.3 62 bps 20.1 -222 bps Operating margins increased 60 bps on account of lower marketing spend Depreciation 94.5 80.7 76.1 24.1 93.3 1.3 Interest 4.9 0.0 4.5 NA 6.0 -17.0 Other Income 252.8 150.0 194.4 30.1 107.6 135.0 Other income increased by 30% mainly due to higher dividend income from subsidieries

PBT 1,558.0 1,560.4 1,450.3 7.4 1,715.0 -9.2 Exceptional Items 18.2 0.0 -12.1 -250.2 70.8 -74.2 Tax Outgo 480.7 492.7 456.0 5.4 541.1 -11.2 PAT 1,095.6 1,067.7 982.2 11.5 1,173.9 -6.7 Net profit grew by 11.5% YoY largely due to higher EBITDA and other income

Key Metrics growth YoY (%) Home care 3.2 NA NA NA Home care segment is witnessing a fast premiumisation specifically in laundry segment Personal care -0.3 NA NA NA Personal care segment reported volume decline mainly due to muted performace of soaps segment as company took price hikes ahead of competition Foods 2.4 NA NA NA Refreshments 8.4 NA NA NA Refreshment segment witnessed a strong growth in Tea brands

Source: Company, ICICIdirect.com Research

Change in estimates FY17E FY18E (| Crore) Old New % Change Old New % Change Comments Sales 32,969.8 32,153.4 -2.5 36,134.6 35,818.5 -0.9 We have reduced our sales estimates mainly on account of muted performance during the quarter. We have trimmed down our estimates for personal care segment for FY18E EBITDA 6,296.0 6,158.9 -2.2 7,102.9 6,943.0 -2.3 EBITDA Margin (%) 18.8 18.8 4 bps 19.3 19.0 -27 bps PAT 4,688.5 4,486.4 -4.3 5,353.9 5,237.9 -2.2 Change in sales estimates resuling in cut down in earnings estimates EPS (|) 21.7 20.7 -4.3 24.7 24.2 -2.2

Source: Company, ICICIdirect.com Research

Assumptions Current Earlier (| crore) FY15 FY16 FY17E FY18E FY16 FY17E FY18E Home care 14,876.6 10,812.0 10,634.5 11,166.2 9,649.6 10,325.1 11,151.1 The segments are restructured post FY15, hence the numbers are not comparable Personal care 9,006.5 16,011.0 16,372.5 17,354.9 14,857.7 16,046.4 17,651.0 Foods 3,631.5 1,095.7 1,188.2 1,307.0 1,075.6 1,183.2 1,325.2 Refreshments 1,891.8 4,482.0 4,859.4 5,345.3 4,398.7 4,838.5 5,370.8 Source: Company, ICICIdirect.com Research

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Key takeaways from conference call • HUL reported volume de-growth after several years mainly on account muted volumes in personal care & foods segment. Volumes contracted 1% during the quarter • The company has withdrawn promotional offers mainly due to a sharp increase in palm oil prices, which neutralised the benefit of benign commodity cost in previous quarters resulting in 3% price led growth during the quarter • Revenues from the personal care segment remained flat mainly on account of negative volume growth in soaps after company took price increase ahead of competition. Personal care industry itself witnessed a slower growth. Similarly oral care segment continued to remain challenging for the company. • In the foods segment, salt sales were impacted due to rains while Annapurna atta witnessed slower growth. Similarly, jams & ketchup, which contribute significantly to foods segment, witnessed slower growth during the quarter. The company launched premium variants of jams, which witnessed good traction in the initial phase • Home care segment grew 3.2% with strong volume growth in premium brand Surf. Laundry segment has been fast witnessing a premiumisation trend, which has resulted in consumption shift from Wheel to Rin to Surf. The company is driving premiumisation with smaller | 10 pack of surf • The company entered the baby care segment with its premium personal care brand Dove in soaps. Similarly, in foods, it launched Minis in multipacks at a lower price to widen the consumer base and attract frequent or guilt free consumption. The company also extended its reach of Indulekha Brand to four more states - Delhi, Punjab, Haryana & Gujarat • In the wake of rising input cost, promotional offers were withdrawn in Q2FY17 to maintain margins. In the next few quarter media spends would also remain soft mainly to neutralise further input cost increase • June-July was one of the worst with respect to consumer demand. However, August & September saw some revival in demand scenario. Good monsoon & higher government spend in rural India could result in revival in demand scenario in H2FY17E • Other income witnessed a 30% increase during the quarter mainly on the back of higher dividend income from subsidiaries and increase in interest income. Tax rate for the year could be marginally lower during the quarter

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Company Analysis Volumes, premiumisation to drive home care revenue growth Home care segment is the second highest contributor to HUL’s revenues (31.1% in FY16) & EBIT (18.6% in FY16). It consists of fabric wash, household care & water business of HUL. HUL’s strong brands in soaps (Lifebuoy, Lux, Liril and ) and detergents (Wheel, Surf Excel, Surf, Vim) aided the company’s dominant position in both segments (~40% of value share in detergents & ~45% value share in soaps) over the years despite the constant tough competition from global player, P&G. Hence, despite the high penetration in the segment (~99%), S&D revenue growth of 12.5% CAGR in FY10-15 has been a mix of volume and price led growth. Going ahead, we expect volumes as well as realisation growth led by favourable sales mix to be revenue drivers for home care segment. HUL’s largest brand Surf Excel (>| 3000 crore in FY16) has been key beneficiary of growing premiumisation trend in the detergents category. To further penetrate the reach of Surf excel, the company has come up with a | 10 pack targeting the users who are currently using lower priced detergents. We expect home care revenues to grow at a CAGR of 6.0% in FY16-18E. With higher contribution of prices in the sales mix, we believe margins from the segment would improve and thereby contribute more to the company’s overall EBIT.

Exhibit 1: Home care revenue (| crore) and YoY growth (%)*

16000 30

14000 20 12000 10 10000 0 8000 -10 6000 -20 4000 2000 -30 0 -40 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Home Care Sales (LHS) Home Care Sales Growth (RHS)

Source: Company, ICICIdirect.com Research *Until FY15, the above chart reflects numbers of soaps & detergents segment

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Exhibit 2: Home care EBIT (| crore) – LHS & S&D EBIT Margin (%) – RHS* Exhibit 3: Home care revenue, EBIT contribution to overall performance*

60 2500 16 48.9 49.3 49.0 48.4 46.5 44.6 14 50 2000 12 40 31.1 10 42.3 40.0 40.1 1500 30 36.9 39.6 8 30.5 1000 6 20 4 10 18.6 500 2 0 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Home Care EBIT Home Care EBIT Margin (%) Contribution to Revenues Contribution to EBIT

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research *Until FY15, the above chart reflects numbers of soaps & detergents segment *Until FY15, the above chart reflects numbers of soaps & detergents segment

Personal care remains key beneficiary of rising income levels Personal care remains the highest contributor to HUL’s revenues (47.9% in FY16) & EBIT (67.2% in FY16). From FY16 onwards, personal wash category is also a part of this segment (formerly, personal products (PP)). HUL has a strong brand portfolio across the value pyramid (Premium - Pond’s, , Dove, Close Up; Popular - , , ; Mass – Fair & Lovely, Clinic Plus) and presence across all categories of personal care (hair care, oral care, skin care, men’s grooming, cosmetics & services). We believe the company will be the key beneficiary of a revival in discretionary demand and booming personal products demand in the economy. With the acquisition of Indulekha brand from Mosons Group for a consideration of | 330 crore in FY16, HUL seeks to leverage its strong brand equity in personal care segment and tap into the growth potential across the nascent ‘naturals’ segment in personal care. During the quarter, the company launched Dove Baby (a range of products for the babies), variants of Tresemme and also expanded the reach of Indulekha to four new states. HUL’s premium hair care brand Tresemme became a | 100 crore brand in FY15 further helping the company in the implementation of its premiumisation strategy. We expect the personal care segment to post CAGR (FY16-18E) at 7%.

Exhibit 4: Personal care revenues (| crore) and growth (%) trend*

20000 80 70 16000 60 50 12000 40 30 8000 20 4000 10 0 0 -10 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Personal care Sales (LHS) PC Sales Growth (RHS)

Source: Company, ICICIdirect.com Research *Until FY15, the above chart reflects numbers of personal products segment

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Exhibit 5: PC EBIT (| crore) – LHS and PP EBIT margin (%) – RHS* Exhibit 6: PC’s revenue, EBIT contribution to overall performance*

4000 28 80 67.2 27 70 54.6 3000 52.2 27 60 46.2 48.3 46.4 47.2 47.9 26 50 2000 28.4 31.5 26 40 29.0 29.1 29.3 30 1000 25 29.7 20 25 10 0 24 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY10 FY11 FY12 FY13 FY14 FY15 FY16

PC EBIT PC EBIT Margin (%) Contribution to Revenues Contribution to EBIT Source: Company, ICICIdirect.com Research *Until FY15, the above chart reflects numbers of personal products segment Source: Company, ICICIdirect.com Research *Until FY15, the above chart reflects numbers of personal products segment

Changing consumption habits in tea, coffee & ice creams bode well HUL reorganised its foods & refreshments (F&R) business into two separate units viz. foods and refreshments to sharpen its focus on each of them. From FY16 onwards, the former segment of beverages, which included tea & coffee would also include ice cream & frozen desserts and be rechristened as ‘refreshment’. HUL’s beverage business’ (tea brands: , Taj Mahal, Red Label; coffee brands: Bru) growth at 11.1% CAGR (FY10-15) has been led largely by prices following the high penetration of tea consumption in India, keeping volume growth muted. HUL is the second largest branded tea company in the country and is growing aggressively in the branded coffee business with its brand Bru. Bru coffee became market leader by volume and value in Q3FY16. HUL (Magnum, Cornetto, , Kwality Wall’s) is India’s second largest player in the ice cream segment. With India’s per capita consumption of ice cream itself being low at 400 ml in comparison to 1.6 litre in Indonesia & 7 litre in Brazil, we believe the segment offers huge potential for growth for the company on the back of strong brand equity of HUL’s ice cream brands. Also, with increasing green tea and coffee culture in the country (home and out-of-the home) and shift of consumers to premium flavoured teas and tea bags, premiumisation would be the key revenue driver for HUL’s refreshments portfolio at 10.5% CAGR (FY16-18E), going ahead.

Foods business growth expected at 11% CAGR in FY16-18E Earlier, HUL used to report its foods (Kissan, , Annapurna, Modern Foods), ice cream & frozen desserts as one segment under ‘packaged foods’ while from FY16 onwards, it has moved ice cream & frozen desserts under ‘refreshment ‘segment & exited Modern Foods business. The new segment is now known as ‘foods’. The foods segment, the biggest opportunity for the future but the weakest performer in HUL’s portfolio, posted healthy revenue growth of 21% CAGR in FY10-15 but remained a dragger on the earnings front. We believe that though HUL has strong brands in the segment, Kissan, Knorr, the company has been unable to establish itself in the higher growth segments of packaged food (noodles, dairy, biscuits), keeping earnings growth muted. However, going forward with the exiting of Modern food business, extension of Knorr portfolio to masalas and cooking mixes and instant soups, and premium range of Kissan jams will improve the growth outlook. With HUL’s increasing focus towards developing its foods portfolio while

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driving premiumisation, we expect foods revenue growth at 10% CAGR (FY16-18E). EBITDA margin improvement to 19.3% by FY18E HUL has maintained its raw material (RM) cost to sales ratio at ~53% over the years (CY07-FY15). In spite of an unprecedented increase in RM costs in FY12 (~54%), the company’s strong brand equity across categories helped it to pass on the impact through higher prices while maintaining margins and volume growth. HUL witnessed ~300 bps decline in RM cost as a percentage of sales in FY16 (as per IGAAP) following the significant fall in global commodity prices. Consequently, HUL was able to drive A&P spend to record high levels of 14.4% of sales in FY16 (as per IGAAP). However, we believe that with prospects of rural demand receiving a much needed boost in near to medium term, HUL would be a major beneficiary of improvement in demand scenario. Therefore, we have modelled lower A&P (11% of sales in FY18E as per Ind AS) for the company going forward on the back of expected revival in volume growth. Faster-than-expected revival of rural demand would allow the company to even further reduce A&P spend. This remains a positive risk to our assumption. Going ahead, with HUL shifting its focus towards higher growth and premium product categories that would drive higher realisation coupled with HUL’s internal cost efficiencies, we expect margins to improve to 19.0% by FY18E. We believe the savings in raw material costs, if any, would be directed towards higher marketing spends to fight competition and aid new launches.

Exhibit 7: EBITDA margin (%) and RM cost to sales (%) trend

20 19.0 56 18.5 18.8 19 55 18 16.9 54 17 16.0 15.5 15.5 16 14.9 53 15 13.7 52 14 51 13 50 12 11 49 10 48 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

EBITDA Margin (%) - LHS RM cost to sales (%) - RHS

Source: Company, ICICIdirect.com Research *From FY16 onwards, financials are reported as per Ind AS

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Higher margins & lower taxes to aid PAT growth HUL’s effective tax rate has increased over the years from ~17% in CY07 to 30.3% in FY15 and 30.4% in FY16 as a result of phasing out of tax benefits. However, going ahead, we believe that lower corporate tax rate would more than compensate for expiry of tax benefits in most of its factories. We believe that ~80 bps improvement in operating margins by FY18E would result in steady earnings growth at 12.5% CAGR in FY16- 18E. Exhibit 8: Adjusted PAT (| crore) & tax rate (percentage of PBIT)

6000 40 5238 35 5000 4425 4158 3852 30 4000 3692 3331 25 3000 2599 20 2124 2184 15 2000 10 1000 5 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

PAT - LHS Tax Rate (% of PBIT) - RHS

Source: Company, ICICIdirect.com Research *From FY16 onwards, financials are reported as per Ind AS

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Annual report Analysis In the backdrop of a sharp drop in commodity prices during the year the growth in the domestic market was primarily led by volumes. With the decline in price of raw material primarily for the soap segment, the company proactively took price cuts resulting in higher volumes. Company’s leading brands Surf excel, , Wheel, Rin, Lifebuoy, Fair & Lovely enjoys the brand size of | 2000 crore while brands Lux, Dove, Clinic Plus, Ponds and Vim has | 1000 brand size.

Segmental analysis – Premiumisation and niche segmentation is the key

Soaps and detergents The segment witnessed sharp decline in the raw material prices, which aided the company to drive volume backed by price cuts. Lifebuoy and Dove continued to show strong growth. The company also re-launched Lux with improved offering. Detergent segment, amidst falling crude prices and high competition, was driven by premiumisation. Additionally, company has focused on premiumising Vim portfolio.

Personal Products The discretionary category continued to remain under pressure during the year. The company continued to focus on premiumisation with added benefits like skin lightening, facial cleansing and anti-ageing, into the skin care category. In consonance with the strategy, Fair & Lovely came up with a new Fair & Lovely BB cream, skin lightening portfolio drove performance of Ponds. Additionally, Ponds came up with the Men’s range of facewash. Lakmé also continues to drive premiumisation and came up with Lakmé Absolute, Lakmé Mousse Foundation and Lakmé Absolute eye liner by upgrading users through long lasting 9 to 5 platform, and bringing the global make-up trends to India under the Absolute platform. Oral care faced stiff competition. During the year, the company commissioned its manufacturing facility of deodorant at Khamgaon, Maharashtra during the year, which will help in providing regular supply of high quality deodorant products in Asian markets. Naturals segment In order to tap the increasing ayurvedic and herbal market in India, company revived the Lever Ayush brand in personal care. Additionally, it bought Indulekha brand (in haircare) during the year, which is a premium brand with strong Ayurvedic roots.

Beverages The growth across key brands was driven by a strengthened mix and focused market activities. Riding on premiumisation, 3 Roses strengthen its leadership position in South India. Red Label and 3 Roses Natural care Tea continued to be well placed with differentiated placement providing immunity benefit. Led by the instant coffee franchisee, the coffee business delivered strong growth.

Packaged Foods

The segment continued to do well driven by continuous investment. Company launched two variants in premium jams category and relaunch ketchup variants under the Twist platform. Kissan ketchup gained the title of market leader in the category during the year. Encouraged by the success of Knorr instant soups during FY15 due to favourable price points, company expanded its Knorr portfolio and launched mixed spices under Knorr Chefs Masala. Company exited the bakery segment under

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the brand name of Modern Foods to focus on the core business. It also strengthened its ice cream portfolio by launching Magnum Choco brownie.

Subsidiaries

Unilever India Exports Ltd (FMCG exports business): It posted turnover of | 1000 crore led by personal products segment constituting , Lakmé, Fair & Lovely and Vaseline. On the other hand foods and beverages segment led the profitability.

Lakmé Lever Pvt Ltd: There was a net expansion of 50 salons though inorganic growth taking the total salon count to 280, 52 of which are company owned/managed and 228 are franchisee salons.

Unilever Nepal Ltd: The year was exceptionally challenging for the entity due to the natural tragedy that hit the country and it affected the performance adversely.

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Outlook & valuation HUL’s key growth driver would be the company’s presence across the value pyramid in the segments where it is present. Also, with the company’s increasing focus towards premiumisation (launch of liquid detergents, Magnum, Sunsilk Keratin range, Lipton Green Tea, Bru Gold, flavoured tea bags, etc), we believe revenue and margins would continue to remain healthy with a revival in discretionary demand. HUL’s home care growth would be driven by a mix of volume & realisation growth on the back of premiumisation especially in the detergents. We expect home care revenue growth at 6.0% CAGR (FY16- 18E). For personal care, we believe higher innovation and premiumisation would be key revenue drivers. We expect heightened activity on part of the company in this segment to regain its lost volume growth. We estimate revenue growth in PC at 7.0% CAGR (FY16-18E). For refreshments, we believe premium tea, coffee & ice cream range would drive revenue growth at 10.0% CAGR (FY16-18E). We expect HUL’s foods business also to growth at 10% (FY16-18E) CAGR largely led by realisation growth. HUL’s Board of Directors has approved a scheme of arrangement to return | 2187.3 crore (excess cash reserve) to shareholders. The company will seek approval of shareholders and sanction of the High Court of Mumbai before going ahead with it. If implemented, this move by the company is expected to drive the efficiency of the company’s balance sheet and significantly improve return ratios further for HUL (RoCE of 106.8% and RoE of 111.1% in FY16). This corporate action is expected to be completed by FY17E. We have cut our EPS estimates by 4.3% for FY17E & 2.2% for FY18E mainly due to muted volumes performance in personal care segment in Q2FY17. However, we remain positive on HUL mainly due to government’s focus on rural income levels with the allocated ~| 87700 crore towards rural development in Budget 2016. Rural sales contribute ~35% to HUL’s sales. We estimate sales growth & profitability growth of 8.4% & 12.5% CAGR, respectively, in FY16-18E for HUL. We are changing our target price from | 1000 /share to | 978 /share and maintaining our BUY recommendation.

Exhibit 9: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%) FY15 30170.5 10.1 19.9 11.5 43.5 35.5 103.4 101.4 FY16 30499.1 1.1 19.1 -4.2 45.4 32.1 111.1 106.8 FY17E 32153.4 5.4 20.7 8.5 41.8 30.3 181.2 208.0 FY18E 35818.5 11.4 24.2 16.8 35.8 26.8 219.5 239.6

Source: Company, ICICIdirect.com Research *From FY16 onwards, financials are reported as per Ind AS

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Recommendation history vs. Consensus

1,100 100.0 90.0 1,000 80.0 900 70.0 800 60.0 (|) 50.0 (%) 700 40.0 600 30.0 20.0 500 10.0 400 0.0 Oct-14 Dec-14 Mar-15 May-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Oct-16

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Event Feb-10 Launches 'Must Win, 2010' programme involving strategic pricing & huge distribution push to mop up the company's falling performance Dec-10 Though profit growth remains moderate at 15%, the stock posts a return of ~28% following strong volume growth and marketing initiatives of HUL

Q4FY11 Soaps & detergents margins get dented drastically due to exceptional increase in input (LAB) costs leading the stock to correct ~21% from January-March, 2011 Q1FY12 Hikes prices (5-8% overall & ~21% in S&D) to pass on input cost inflation. Gains market share from unorganised players with rising input costs H1FY13 from April, 2013) mirroring the FMCG Index as defensives were the safest bet in the market considering the slowing economic scenario H2FY13 Stock declines ~12% led by consistent weakness in volume growth (low sigle digits) Apr-13 Unilever announces open offer at | 600/share to increase its stake in HUL to 75% from 52.5%

Jul-13 The stock soars ~12% on account of FTSE and MSCI re-balancing post the closure of open offer Oct-14 Volume growth remains subdued at 4% as urban discretionary demand remain dismal Dec-14 Commodity prices including palm oil, crude and related derivatives witness significant decline Sep-15 HUL divests its bread and bakery business under the brand ‘Modern’ to Nimman Foods Private Ltd., an investee company of the Everstone Group Dec-15 HUL signs an agreement with Mosons Group to acquire Indulekha, a premium Ayurvedic hair oil brand, for a consideration of | 330 crore Mar-16 HUL signs an agreement for sale of its rice exports business to LT Foods for a consideration of | 25 crore

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 1 Unilever PLC 30-Sep-16 55.54 1,202.0 0.0 Promoter 67.2 67.2 67.2 67.2 67.2 2 Brooke Bond Group, Ltd. 30-Sep-16 4.93 106.7 0.0 FII 13.9 13.9 14.2 14.4 14.2 3 Unilever UK & CN Holdings, Ltd. 30-Sep-16 2.78 60.1 0.0 DII 4.8 5.0 4.8 5.0 5.2 4 Brooke Bond South India Estates, Ltd. 30-Sep-16 2.44 52.7 0.0 Others 14.1 13.9 13.8 13.4 13.4 5 Life Insurance Corporation of India 30-Sep-16 1.55 33.4 0.0 6 Brooke Bond Assam Estates, Ltd. 30-Sep-16 1.52 32.8 0.0 7 Aberdeen Asset Management (Asia) Ltd. 31-Aug-16 1.01 21.9 -0.6 8 The Vanguard Group, Inc. 30-Sep-16 0.92 19.8 -0.2 9 BlackRock Institutional Trust Company, N.A. 30-Sep-16 0.81 17.5 0.2 10 Vontobel Asset Management, Inc. 31-Aug-16 0.77 16.6 -0.7

Source: Reuters, ICICIdirect.com Research

Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares ICICI Prudential Asset Management Co. Ltd. 36.37m 2.66m Emerging Global Advisors, LLC -25.5m -1.96m ARISAIG Partners (Asia) Pte. Ltd. 26.65m 2m RBC Investment Management (Asia) Ltd. -15.84m -1.14m William Blair & Company, L.L.C. 16.99m 1.29m Vontobel Asset Management, Inc. -9.08m -0.66m Franklin Advisers, Inc. 8.22m 0.62m Aberdeen Asset Management (Asia) Ltd. -8.68m -0.63m Union Investment Luxembourg S.A. 6.29m 0.47m British Columbia Investment Management Corp. -5.57m -0.42m

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

Financial summary

Profit and loss statement | Crore Cash flow statement | Crore (Year-end March) FY15 FY16 FY17E FY18E (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 30805.6 31061.0 32768.3 36463.2 Profit after Tax 4,315.3 4,136.5 4,486.4 5,237.9 Growth (%) 9.9 0.8 5.5 11.3 Add: Depreciation 286.7 320.8 349.2 326.5 Raw Material Expenses 15,623.6 15,305.3 16,260.3 18,051.2 (Inc)/dec in Current Assets -94.5 99.8 -350.7 -844.3 Employee Expenses 1,578.9 1,572.8 1,662.4 1,862.6 Inc/(dec) in CL and Provisions 179.0 354.3 641.0 1,114.6 Marketing Expenses 3,874.9 3,600.0 3,814.9 3,940.0 CF from operating activities 4686.4 4911.5 5125.8 5834.7 Administrative Expenses 1,930.8 0.0 1,029.3 2,292.4 (Inc)/dec in Investments -17.9 -14.9 -100.0 -100.0 Other expenses 2,589.2 4,833.8 3,842.5 3,374.1 (Inc)/dec in loans & advances 22.1 2.2 -25.0 -25.0 Total Operating Expenditure 25,597.4 25,311.8 26,609.4 29,520.3 (Inc)/dec in Fixed Assets -481.4 -684.9 86.0 -200.0 EBITDA 5208.2 5749.1 6158.9 6943.0 Others -25.0 181.5 -992.3 24.3

Growth (%) 16.4 10.4 7.1 12.7 CF from investing activities -502.3 -516.2 -1031.4 -300.7 Depreciation 286.7 320.8 349.2 326.5 Issue/(Buy back) of Equity 0.1 0.0 0.0 0.0 Interest 16.8 15.3 0.0 0.0 Inc/(dec) in loan funds 0.0 0.0 0.0 0.0 Other Income 618.4 563.8 576.8 608.3 Dividend paid & dividend tax -3,881.2 -4,139.5 -4,285.6 -5,294.0 Exceptional Income 664.3 -30.8 89.0 0.0 Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0 PBT 6,187.4 5,946.1 6,536.7 7,224.7 Others 13.6 19.6 -1,500.0 0.0 Total Tax 1,872.2 1,809.6 2,050.3 1,986.8 CF from financing activities -3867.5 -4119.9 -5785.6 -5294.0 PAT 4315.3 4136.5 4486.4 5237.9 Net Cash flow 316.6 275.4 -1,691.1 240.0 Growth (%) 11.6 -4.1 8.5 16.8 Opening Cash 2,221.0 2,537.6 2,813.0 1,121.8 EPS (|) 19.9 19.1 20.7 24.2 Closing Cash 2537.6 2813.0 1121.8 1361.9

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research *From FY16 onwards, financials are reported as per Ind AS

Balance sheet | Crore Key ratios (Year-end March) FY15 FY16 FY17E FY18E (Year-end March) FY15 FY16 FY17E FY18E Liabilities Per share data (|)

Equity Capital 216.4 216.4 216.4 216.4 EPS 19.9 19.1 20.7 24.2 Reserve and Surplus 3,508.4 3,525.1 2,225.8 2,169.8 Cash EPS 21.3 20.6 22.3 25.7 Total Shareholders funds 3,724.8 3,741.5 2,442.2 2,386.2 BV 17.2 17.3 11.3 11.0 Other Non Current Liabilities 170.1 218.2 218.2 218.2 DPS 15.0 16.0 17.0 21.0 Long Term Provisions 956.4 1124.4 132.8 157.1 Cash Per Share 11.7 13.0 5.2 6.3 Total Liabilities 4851.2 5084.0 2793.2 2761.5 Operating Ratios (%) Assets EBITDA/Total Operating Income 16.9 18.5 18.8 19.0 Gross Block 4,408.6 5,065.4 5,365.4 5,565.4 PBT Margin 17.9 19.2 19.7 19.8 Less: Acc Depreciation 1,973.1 2,162.7 2,511.9 2,838.4 PAT Margin 14.0 13.3 13.7 14.4 Net Block 2,435.5 2,902.7 2,853.6 2,727.0 Inventory days 31 30 30 30 Capital WIP 479.0 386.0 0.0 0.0 Debtor days 9 13 13 13

Total Fixed Assets 2,914.5 3,288.7 2,853.6 2,727.0 Creditor days 64 66 66 66 Net Intangible Assets 22.0 12.0 12.0 12.0 Return Ratios (%) Other Investments 654.1 669.0 769.0 869.0 RoE 103.4 111.1 181.2 219.5 Liquid Investments 0 0 0 0 RoCE 101.4 106.8 208.0 239.6 Inventory 2,602.7 2,528.4 2,642.7 2,944.0 Debtors 782.9 1,064.5 1,101.1 1,275.7 Valuation Ratios (x) Loans and Advances 657.3 673.3 704.7 785.1 P/E 43.5 45.4 41.8 35.8 Investments & Other CA 59.3 62.5 61.7 68.7 EV / EBITDA 35.5 32.1 30.3 26.8 Cash 2,537.6 2,813.0 1,121.8 1,361.9 EV / Net Sales 6.1 6.1 5.8 5.2 Total Current Assets 9,263.5 9,439.1 8,098.7 9,183.0 Market Cap / Sales 6.2 6.2 5.8 5.2 Creditors 5,288.9 5,497.9 5,814.0 6,476.8 Price to Book Value 50.4 50.1 76.8 78.6 Provisions & other CL 3,493.9 3,639.3 3,964.1 4,416.0 Solvency Ratios Total Current Liabilities 8,782.8 9,137.2 9,778.2 10,892.7 Debt/EBITDA 0.0 0.0 0.0 0.0 Net Current Assets 480.7 302.0 -1,679.5 -1,709.7 Debt / Equity 0.0 0.0 0.0 0.0 Others Non-Current Assets 779.4 812.2 837.2 862.2 Current Ratio 0.8 0.7 0.7 0.7 Application of Funds 4851.2 5084.0 2793.2 2761.5 Quick Ratio 0.5 0.4 0.4 0.4

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

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ICICI Securities Ltd | Retail Equity Research Page 13

ICICIdirect.com coverage universe (FMCG)

CMP M Cap EPS (|) P/E (x) Price/Sales (x) RoCE (%) RoE (%) Sector / Company (|) TP(|) Rating (| Cr) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Colgate (COLPAL) 937 971 Hold 26,402 21.2 22.1 27.0 44.2 42.3 34.7 6.4 5.6 5.0 77.6 71.5 75.6 58.7 50.1 52.9 Dabur India (DABIND) 291 338 Buy 51,026 7.1 7.6 8.3 40.9 38.5 35.2 6.6 6.0 5.5 31.1 28.4 27.7 30.1 26.8 25.8 GSK CH (GLACON) 6,025 6,765 Buy 25,965 163.3 171.7 190.9 36.9 35.1 31.6 6.0 5.5 5.0 39.4 36.4 35.8 28.1 26.3 26.1 Hindustan Unilever (HINLEV) 840 978 Buy 187,610 19.1 20.7 24.2 43.9 40.5 34.7 6.2 5.8 5.2 106.8 208.0 239.6 111.1 181.2 219.5 ITC Limited (ITC) 243 277 Buy 301,589 7.7 8.8 10.0 31.5 27.7 24.4 5.8 5.2 4.7 42.2 46.0 49.1 28.7 31.8 35.1 Jyothy Lab (JYOLAB) 359 397 Buy 6,463 5.0 10.0 12.3 71.6 36.0 29.1 4.1 3.8 3.3 19.2 18.2 21.4 8.8 16.3 18.9 Marico (MARIN) 278 323 Buy 37,738 5.6 7.0 8.4 49.6 39.9 33.1 6.3 5.7 5.0 46.2 49.3 49.4 34.5 37.3 38.0 Nestle (NESIND) 6,936 7,495 Buy 65,635 58.4 108.2 155.1 118.7 64.1 44.7 8.1 6.6 5.7 29.7 34.2 40.8 32.3 36.3 44.9 Tata Global Bev (TATTEA) 137 147 Hold 8,693 5.2 7.6 8.5 26.5 18.1 16.2 1.1 1.0 1.0 7.7 9.7 10.0 5.6 8.0 8.4 VST Industries (VSTIND) 2,382 2,437 Buy 3,166 99.2 117.0 135.4 24.0 20.4 17.6 3.6 3.2 3.0 59.7 67.4 70.6 41.3 45.4 49.1 Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 14

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities Ltd | Retail Equity Research Page 15

ANALYST CERTIFICATION We /I, Sanjay Manyal, MBA (Finance) and Tejashwini Kumari, MBA (Finance), 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: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities is full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com

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ICICI Securities Ltd | Retail Equity Research Page 16