27 July 2013
1QFY14 Results Update | Sector:
Consumer
Hindustan Unilever
BSE SENSEX
19,748
Bloomberg
Equity Shares (m)
MCap INR b /USD b
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
5,886
HUVR IN
2,162.5
1,435/24.3
725/432
6/41/25
Financials & Valuation (INR B)
Y/E MAR
Sales
EBITDA
PAT
EPS (INR)
Gr. (%)
BV/Sh. INR
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2013 2014E 2015E
252.1
40.0
33.1
15.3
27.8
21.5
71.4
94.2
43.2
30.9
281.3
45.5
35.4
16.4
6.9
26.8
61.3
83.5
40.4
24.8
320.5
52.2
38.9
18.0
9.8
31.3
57.5
81.8
36.9
21.2
CMP: INR664
TP: INR600
Downgrade to Sell
Revenue growth disappoints:
HUVR’s 1QFY14 results were weak. Revenues grew
6.7% to INR68.1b (est INR70.5b), EBITDA margin expanded 70bp to 15.9% (est
16%) and recurring PAT grew 3.6% to INR8.85b (est INR8.81b). Volume growth of
4% was in-line. Weakness in Personal Product (PP) was the key disappointment.
15.8% revenue growth in Beverages was the key positive surprise.
Best of gross margin behind:
Gross margin expanded 160bp to 48.9% on account
of lower raw material cost. We believe the impact of INR depreciation will
manifest itself and the best of the margins are behind.
Segment-wise performance:
(1) S&D sales grew 7.7% despite double-digit volume
growth in Soaps; EBIT grew 14% with 70bp margin expansion to 12.9%, (2) PP sales
grew 2%, the lowest since March 2009; margins declined 90bp to 24.9%.
Management call highlights:
(1) Slowdown is broad-based with disproportionate
impact on discretionary and premium categories, (2) Market growth has come off
700bp in 12 months, (3) Media inflation is a possibility after new TRAI guidelines.
Outlook not too optimistic:
While 4% volume growth is not a surprise, 1QFY14
results reinforce weak discretionary consumption demand. Lagged impact of
macro slowdown is getting increasingly evident. Our channel checks in HUVR do
not suggest any silver-lining and 2QFY14 has begun on a subdued note.
Downgrading to Sell:
HUVR’s premium valuations (40x FY14E and 36.8x FY15E
EPS), partly a function of open offer led benchmark, reduced float and market’s
willingness to pay defensive premium, do not leave any margin for error. Given
this context of expensive valuations and likely headwinds from (a) further
weakness in staples consumption, (b) absence of margin levers, and (c) lowest
earnings CAGR of 5% in the universe, we downgrade our rating from Neutral to
Sell
with a revised target price of INR600 (33x FY15E EPS, 10% premium to ITC).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.

Hindustan Unilever
1Q
Volumes up
4%;
Gross Margin expands 170bp
Sales grew 7% to INR 66.9b, led by volume growth of 4% (est 4%). Domestic
FMCG business grew modest 7.1%, with HPC growing at 5.9% and Foods
reporting a growth of 12.5%.
Volume growth for the quarter came in at 4% led by double digit volume growth
in Soaps portfolio. Volume growth is lowest since Sep’09.
In the press conference management indicated lagged impact of macro
slowdown being felt in FMCG industry.
Gross margin expanded 170bp to 48.9% on account of lower input costs.
However, going forward, we expect challenges due to recent rupee
depreciation. We believe best of the gross margins are behind and HUVR may
need to undertake pricing actions to defend margins
Ad-spends increased 30bp YoY to 13.1%. We don’t see any letdown in ad pro
spends given the slowdown in volumes.
EBITDA increased 12.3% to INR 10.9b (est INR11.3b) as margins expanded 70bp
to 15.9% (est 16%).
Financial other income declined 19% YoY to INR 1.77b due to higher base (1Q13
other income went up 4.3x).
Despite miss on EBITDA, Adj PAT came in-line with a 3.6% YoY growth to INR
8.85b, partially aided by lower than est tax rate. Tax rate for the quarter stood
at 25.6% up 90bp (est 26%)
Volumes impacted by PP and
pipeline filling in 4Q
Domestic FMCG sales up 7%
Pricing growth fading off
Gross and EBITDA margins expand
110bps and 50bps, resp
ASP up 95bps YoY; competitive
intensity rising in HPC
EBIT contribution of PP coming
down consistently
27 July 2013
2

Hindustan Unilever
Soaps and detergents margins expand 70bp YoY; PP posts weakest
performance since Mar’09
Soaps and Detergent:
Sales growth of 7.7% was led by double digit volume
growth in Soaps. In laundry, Surf and Rin posted double digit revenue growth.
Margins expanded 70bp YoY to 12.9 % due to benefit from easing raw materials
prices and better product mix.
S&D EBIT margins benefit from low PFAD prices
S&D sales weak despite strong volume growth in soaps
Source: Company, MOSL
Source: Company, MOSL
Personal Products:
Sales grew 2%, impacted by de-growth in F&L. Other brands
in Skin Care posted good performance especially Color Cosmetics – Lakme & Elle
18. Management in the press conference has indicated corrective actions in F&L.
We believe re-launch of the F&L is round the corner and the success of the same
will have significant influence on HUL’s skin care and consequently Personal care
performance going forward.
Hair and Oral care
delivered double digit revenue growth. HUVR introduced
number of innovations across the PP portfolio - Lakmé Fresh Fairness Clean up
range, Sunsilk Radiant Shine, Dove Cellular Repair with keratin actives and
TRESemmé Keratin Smooth
PP EBIT margins down 90bps YoY
PP sales growth at multi year low
Source: Company, MOSL
Source: Company, MOSL
27 July 2013
3

Hindustan Unilever
Beverages:
Sales delivered strong 15.6% growth YoY led by double digit growth
in Tea. Taaza outperformed the Tea portfolio as per management. Premium
segments within the Tea – teabags – doubled in 1Q. Margins expanded 380bps
YoY to 18.3% - EBIT growth of 46% YoY.
Processed Foods:
Sales continued to be impacted by prevailing weak
consumption trends in the category and posted a modest 5 % growth led by
Kissan and Knorr soups. Slowdown in Ice Cream segment impacted the
performance as per management. Margins expanded 270bps YoY to 8.4% with a
strong 55% EBIT growth.
Processed foods margins continue to remain volatile
Beverages EBIT margins consistently improving
Source: Company, MOSL
Source: Company, MOSL
Raw material prices show mixed trend; Pal oil benign, Tea prices rising
PFAD prices were off 34% YoY during the quarter driving margin expansion in
Soaps and Detergents portfolio. We see downside risks to margins ahead as
impact of rupee depreciation manifests itself going forward. In our view, best of
the gross margins are behind.
Conference call highlights
Summary
Market growth has slowed down across categories and channels. More
prominent in premium and discretionary segments.
Skin category has pronounced impact on PP – due to issues in F&L. F&L is facing
issues due to lower product acceptance in some of the media dark areas when
its color was changed from white to pink. Corrective actions are underway – [we
are expecting a relaunch in late August].
Pricing effect will continue to fade.
Benefits of RM deflation is largely over – rupee depreciation plus inflation in
palm oil (Palm oil prices have moved up since June).
Likelihood of higher media inflation ahead due to recent TRAI guidelines.
Overall, the management continued to emphasize the slowdown in market
volumes and its efforts at containing the impact on HUL through competitive
actions as well as stepped up innovation intensity.
Details
27 July 2013
Market volume growth down 700bps between Sep’12 and Jun’13
Nielson shows slowdown in rural and urban.
4

Hindustan Unilever
HUL is seeing stronger growth in rural markets due to the earlier actions of
distribution expansion.
Modern trade growth has slowed vs. 2012 – not growing faster vs. general
trade.
Competitive intensity remains high
4% volume growth is ahead of the market – adjusting for pipeline filling in 4Q13
, effective volume growth would be ~5%, LBT strike also impacted in June in
Maharashtra.
Deflation in soaps – pricing anniversary in Detergents
PP – market volume growth has come off 1000bps in last 12 months
Skin – market volume growth was flat
Double digit volume growth in Ponds, Lakme and Dove. FAL holding shares as
per management.
Colour cosmetics – double digit volume growth,
Magnum test launch in Chennai – good initial response
Oral – competitive intensity will remain high in times to come
Skin – FAL had high base due to relaunch in JQ’12. Change in color from white to
pink has been proving as an issue from product acceptance viewpoint. Especially
in areas which are media dark.
Don’t expect slowdown in Skin category to reverse soon.
Likelihood of higher media inflation ahead – TRAI regulations on advertising will
play out. Commercial time available on different broadcasters vary from 25
minutes to 16 minutes. Expect 25-30% shrinkage in inventory beginning 1
st
October if all broadcasters become compliant with the TRAI regulations. Thus,
broadcasters will look for raising rates. Media inflation will vary from company
to company. It may require HUL to take a fresh look at allocation of media
resources in terms of mix etc.
Despite the slowdown in market growth – innovation intensity continues.
Soaps & Detergents – pace of up-trading has come down.
Recurring profit does not include the benefits of tax write-back of INR 640mn.
Change
in estimates:
We revise our estimates to factor in the sales miss and higher other income vs.
our estimates
Change in estimates (INR m)
New
FY14E
FY15E
281,326
326,502
45,463
52,224
35,432
38,910
Old
FY14E
FY15E
284,955 324,775
45,700
52,732
35,444
38,884
Change
FY14E
FY15E
-1.3%
0.5%
-0.5%
-1.0%
0.0%
0.1%
Source: Company, MOSL
Sales
EBITDA
PAT
Valuation and view: Expensive valuations + deteriorating consumption
backdrop; downgrade to Sell
Weak discretionary consumption demand is once again reinforced by HUVR’s
1Q14 results. Absence of disposable income growth coupled with high
consumer price inflation is playing spoilsport in our view. Lagged impact of
macro slowdown is getting increasingly evident.
5
27 July 2013

Hindustan Unilever
Our channel checks in HUVR do not suggest any silver lining. 2QFY14 has begun
on sombre note as per our channel sources. While good monsoon does offer
some respite from rural consumption viewpoint, we expect overall consumption
environment to remain subdued.
HUVR’s valuations (40 x FY14E and 36.8x FY15E), partly a function of open offer
led benchmark and partly market’s willingness to pay defensive premium, does
not leave any margin for error. Given this context of expensive valuations and
likely headwinds from a) further weakness in staples consumption b) absence of
margin levers and c) lowest earnings CAGR of 5% in the universe, we downgrade
our rating from Neutral to Sell with a revised target price of INR 600 (33x FY15e
EPS, 10% premium to the multiple we ascribe to ITC).
While open offer price of INR600 (implying a FY15 P/E of 33.4x ) and lower
liquidity in the stock does set a benchmark for floor price and can prevent
meaningful correction, worsening fundamentals prevents us from getting
constructive.
Notwithstanding continued weak macro and market outlook and thus possibility
of continued defensive premium for quality defensives like HUVR, we prefer to
stick to fundamental earnings based valuation metric and await better entry
opportunities ahead. In the large caps our relative preference stays with ITC
given the high teens earnings CAGR plus relatively sober valuations vis-a-vis
MNC consumer names.
27 July 2013
6

Hindustan Unilever
Hindustan Unilever: an investment profile
Company description
HUL is the largest company in the FMCG industry, with
market leadership in soaps, detergents and personal
care categories. It has a wide distribution network with
direct reach of over 1m retail outlets. The company is a
subsidiary of Anglo Dutch FMCG giant Unilever.
Recent developments
Unilever PLC has acquired additional 14.78% stake
through open offer.
HUL has appointed Mr Sanjiv Mehta as the new MD
from 1
st
October 2013.
Valuation and view
We are downgrading our rating from Neutral to
Sell
owing to expensive valuations and subdued demand
outlook.
HUVR’s valuations (40x FY14E and 36.8x FY15E),
partly a function of open offer led benchmark and
partly market’s willingness to pay defensive
premium, does not leave any margin for error
Key investment argument
Market leader in most of the categories and has
strong brands.
Wide product range across categories, with
presence at all price points.
Decline in raw material prices would result in
margins improvement.
Sector view
have a cautious view on the sector on back of
inflationary pressure in the economy.
Companies with competitive position would be
better placed to withstand any slowdown in a
particular segment.
Longer term prospects bright, given rising incomes
and low penetration.
We prefer companies with earnings visibility in an
environment where consumption is moderating.

We
Key investment risk
Slowdown in GDP is showing lagged impact on
consumption. This poses biggest risk to HUL’s
volumes.
Competitive pressure has intensified with more
companies entering personal care and toilet soap
and detergents, which account for 80% of HUL'
profits.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
HUL
40.4
36.8
24.8
21.2
4.9
4.2
30.1
26
ITC
33.5
28.7
12.7
11.5
8
6.9
21.7
18.8
Nestle
42
34
22.2
17.7
5.5
4.5
24.7
20.4
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
16.4
18.0
Consensus
Forecast
16.7
18.3
Variation
(%)
-1.9
-1.4
Target price and recommendation
Current
Price (INR)
663
Target
Price (INR)
600
Upside
(%)
-9.5
Reco.
Sell
Shareholding pattern (%)
June-13
Promoter
Domestic Inst
Foreign
Others
52.5
7.1
20.6
19.8
Mar-12
52.5
8.1
22.5
17.0
June-12
52.5
9.9
20.4
17.2
Stock performance (1-year)
27 July 2013
7

Hindustan Unilever
Financials and valuation
27 July 2013
8

Hindustan Unilever
NOTES
27 July 2013
9

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Hindustan Unilever
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HINDUSTAN UNILEVER LTD
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