Result Update October 27, 2016 Rating matrix Rating : Buy Hindustan Unilever (HINLEV) | 840 Target : | 978 Target Period : 12 months Potential Upside : 13% Revival in rural growth may be saviour... What’s changed? • Hindustan Unilever 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 The Sales 7697.6 7595.6 1.3 7987.7 -3.6 company has withdrawn most promotional offers during the quarter.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). Surf 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). Lifebuoy, Fair & Lovely are | 2000+ crore DII Holding (%) 5.2 brands while Lux, Dove, 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. ICICI Securities Ltd | Retail Equity Research 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 ICICI Securities Ltd | Retail Equity Research Page 2 Key takeaways from conference call • HUL reported volume de-growth after several years mainly on account muted volumes in personal care & foods segment.