Hindustan Unilever “Levers” in place for demand recovery; ‘Accumulate’ July 21, 2015 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 Q1FY16 Result Update Amnish Aggarwal [email protected]+91‐22‐66322233 Gaurav Jogani [email protected]+91‐22‐66322238 Rating Accumulate Price Rs891 Target Price Rs879 Implied Upside ‐1.3% Sensex 28,182 Nifty 8,529 (Prices as on July 21, 2015) Trading data Market Cap. (Rs bn) 1,927.4 Shares o/s (m) 2,162.5 3M Avg. Daily value (Rs m) 2570 Major shareholders Promoters 67.22% Foreign 14.56% Domestic Inst. 4.18% Public & Other 14.04% Stock Performance (%) 1M 6M 12M Absolute 3.9 (5.4) 42.0 Relative 0.7 (2.9) 32.4 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 19.6 21.5 ‐9.1 2017 23.3 24.7 ‐5.7 Price Performance (RIC: HLL.BO, BB: HUVR IN) Source: Bloomberg 0 200 400 600 800 1,000 1,200 Jul ‐14 Sep‐14 Nov‐14 Jan‐15 Mar‐15 May‐15 Jul ‐15 (Rs) HUVR posted 6% volume growth and 17.3% EBITDA growth in a scenario of benign commodity costs, slowing rural demand and heightened competition from unorganised players, which shows the success of management strategy to sustain share and achieve volume‐led growth. After the success of FAL and Axe, HUVR is looking at reigniting growth in Wheel and Oral care. We believe that HUVR will gain from uptick in demand in the next cycle, given that it has invested ahead of its competitors on 1) product innovations 2) marketing and distribution revamp 3) development of future growth segments and 4) aggressive pricing and marketing strategy in low demand low input cost scenario. We are reducing our estimates by ~5% to factor in higher price deflation in S&D and 20% decline in financial other income. We remain positive, given strong growth strategy, high dividend payout of 75%, and ROE and ROCE exceeding 100% and 140%. Retain “Accumulate”. Concall Takeaways: 1) HUVR had an impact of 170bps on sales, 65bps on EBIT due to phasing out of tax benefits 2) S&D segment has seen price deflation; HUVR has done another 2% price reductions to pass on input cost gains 3) Rural and Urban demand growth has converged; rural recovery depends upon multiple factors including monsoons 4) After the success of market intervention success in Axe and FAL, HUVR is undertaking steps to revive growth in oral care and Wheel detergent 5) Volume growth and sustaining market share is the key focus of HUVR in the current scenario, given that it had lost share in 2009 commodity price deflation. Adj.PAT up 3.2% lowers other income and higher tax: Q1 net sales increased by 5% (7% without 170bps excise impact) on 6% volume growth (6% in Q4). Gross profit grew 12.8% as margins expanded by 360bps on benign input costs; EBITDA margins expanded by 200bps as 200bps higher adpro neutralised gains. 46.3% decline in financial other income and 380bps higher tax resulted in 3.2% growth in adjusted PAT at Rs10.5bn. Key financials (Y/e March) 2014 2015 2016E 2017E Revenues (Rs m) 280,191 307,341 335,663 386,644 Growth (%) 8.6 9.7 9.2 15.2 EBITDA (Rs m) 44,753 51,043 60,046 70,545 PAT (Rs m) 35,553 37,946 42,315 50,475 EPS (Rs) 16.4 17.5 19.6 23.3 Growth (%) 7.3 6.7 11.5 19.3 Net DPS (Rs) 13.0 15.0 15.5 17.5 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 16.0 16.6 17.9 18.2 RoE (%) 119.5 108.4 110.8 121.4 RoCE (%) 87.1 92.2 95.0 94.9 EV / sales (x) 6.7 6.2 5.6 4.8 EV / EBITDA (x) 42.0 37.3 31.2 26.5 PE (x) 54.2 50.8 45.6 38.2 P / BV (x) 58.8 51.8 49.3 43.8 Net dividend yield (%) 1.5 1.7 1.7 2.0 Source: Company Data; PL Research
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Hindustan Unilever
“Levers” in place for demand recovery; ‘Accumulate’
July 21, 2015
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
C/F from Investing (10,848) (8,283) (5,224) (9,213)
C/F from Financing (40,995) (44,525) (47,163) (52,827)
Inc. / Dec. in Cash 2,128 3,043 (1,173) 892
Opening Cash 3,963 7,047 8,143 7,684
Closing Cash 7,047 8,143 7,684 9,334
FCFF 41,763 48,289 33,844 51,485
FCFE 41,763 48,289 33,844 51,485
Key Financial Metrics
Y/e March 2014 2015 2016E 2017E
Growth
Revenue (%) 8.6 9.7 9.2 15.2
EBITDA (%) 11.8 14.1 17.6 17.5
PAT (%) 7.3 6.7 11.5 19.3
EPS (%) 7.3 6.7 11.5 19.3
Profitability
EBITDA Margin (%) 16.0 16.6 17.9 18.2
PAT Margin (%) 12.7 12.3 12.6 13.1
RoCE (%) 87.1 92.2 95.0 94.9
RoE (%) 119.5 108.4 110.8 121.4
Balance Sheet
Net Debt : Equity (1.4) (0.7) (1.3) (1.4)
Net Wrkng Cap. (days) (63) (53) (47) (41)
Valuation
PER (x) 54.2 50.8 45.6 38.2
P / B (x) 58.8 51.8 49.3 43.8
EV / EBITDA (x) 42.0 37.3 31.2 26.5
EV / Sales (x) 6.7 6.2 5.6 4.8
Earnings Quality
Eff. Tax Rate 25.9 30.0 31.4 30.0
Other Inc / PBT 12.9 11.4 7.9 7.0
Eff. Depr. Rate (%) 5.9 5.9 6.0 6.0
FCFE / PAT 117.5 127.3 80.0 102.0
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e March 2014 2015 2016E 2017E
Shareholder's Funds 32,771 37,248 39,154 44,005
Total Debt — — — —
Other Liabilities 10,811 1,701 11,225 12,261
Total Liabilities 43,581 38,949 50,379 56,266
Net Fixed Assets 27,418 31,023 30,015 30,220
Goodwill — — — —
Investments 6,362 32,779 6,541 6,541
Net Current Assets 8,184 (25,155) 11,831 17,479
Cash & Equivalents 46,796 25,376 52,673 60,037
Other Current Assets 47,791 46,861 52,437 60,633
Current Liabilities 86,403 97,392 93,279 103,191
Other Assets 1,617 1,960 1,992 2,026
Total Assets 43,581 40,607 50,379 56,267
Quarterly Financials (Rs m)
Y/e March Q2FY15 Q3FY15 Q4FY15 Q1FY16
Net Revenue 76,393 77,743 76,041 81,051
EBITDA 12,420 13,315 12,467 15,064
% of revenue 16.3 17.1 16.4 18.6
Depr. & Amortization 764 731 705 749
Net Interest 63 42 — 1
Other Income 1,978 1,201 984 1,086
Profit before Tax 13,571 13,743 12,746 15,400
Total Tax 4,001 4,189 4,119 4,873
Profit after Tax 9,882 12,522 10,181 10,464
Adj. PAT 9,570 9,553 8,626 10,528
Key Operating Metrics
Y/e March 2014 2015 2016E 2017E
Volume Growth % 3.8 3.4 6.9 8.6
Gross Margin % 48.8 49.3 51.0 50.1
Ad spends% 13.2 12.8 13.6 13.0
Tax Rate % 25.9 30.7 31.4 30.0
Personal care Sales Gr % 8.7 10.9 13.4 17.9
Personal Care Margins % 25.5 26.9 27.4 27.8
S&D Sales Gr % 7.7 8.7 4.4 13.5
S&D Margins % 13.1 13.7 14.7 14.8
Source: Company Data, PL Research.
July 21, 2015 9
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
42.9%39.8%
17.3%
0.0%0%
10%
20%
30%
40%
50%
BUY Accumulate Reduce Sell
% of Total Coverage
BUY : Over 15% Outperformance to Sensex over 12‐months
Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months
Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month
Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
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