24 September 2014
Update | Sector: Consumer
Hindustan Unilever
BSE Sensex
26,745
S&P CNX
8,002
CMP: INR764
TP: INR690
Sell
Demand stable; WIMI launched
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Benefits of commodity cost correction to reflect with a lag
HUVR IN
2,163.2
767/536
5/7/-15
1,653.0
27.1
Financial Snapshot (INR Billion)
Y/E Mar
2015E 2016E 2017E
Net Sales
308.8 348.7 400.9
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Share
(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
52.3
40.1
18.5
10.2
17.3
59.4
44.7
20.7
11.5
19.3
68.5
49.8
23.0
11.4
21.2
114.3 113.1 113.8
148.0 149.3 155.6
41.2
44.1
37.0
39.7
33.2
36.0
Shareholding pattern (%)
As on
Jun-14 Mar-14 Jun-13
Promoter
DII
FII
Others
67.2
4.1
14.6
14.1
67.3
4.1
14.1
14.5
52.5
7.1
20.2
20.2
FII includes depository receipts
Stock Performance (1-year)
Key highlights from HUVR management interaction:
Market remains soft:
Demand for HPC categories remains soft both for
market and HUVR, as per management. HUVR has not seen any material
change in the demand environment QoQ. While 1QFY15 benefited from a
lower base in 1QFY14 (on account of transport strike related channel filling
in 4QFY13), 2QFY15 does not have any such element, barring PP, where F&L
saw winter loading in the base ahead of a re-launch. For HUVR, we expect
volume growth to come in at 5% for 2QFY15, while realization growth is
estimated at 7%. Pricing component has not changed much barring Soaps.
Detergents continue to be driven by the premium segment (Surf), while
mass end (Wheel) remains subdued despite corrective actions in targeted
markets.
Back-ended benefits of commodity correction:
PFAD prices have corrected
on an average 10.4% QoQ (up 5.5% YoY), while LAB prices are down 4% YoY
and up 1% QoQ. Benefits of lower RM prices should reflect in the margins
with a lag due to inventory and price covers. We note that lower
commodity prices in the past have typically resulted in increased activity by
unbranded segment of the market.
Competitive intensity picks up sequentially:
As per management, media
intensity has gone up sequentially. Competitive intensity has increased in
both Soaps and Detergents, while it has stabilized in Oral Care. Overall, we
expect HUVR’s operating margin to expand 80bp in 2QFY15.
Fair & Lovely
gains further traction:
Fair & Lovely
continues to see good
traction and has sequentially strengthened, as per management. We note
that Personal Products revenue growth in the base was partially boosted by
F&L winter loading post its re-launch in 2QFY14. Hair Care remains steady,
as per management (delivered consistent double digit growth).
Micromarketing - Project WIMI:
HUVR has gone live with WIMI (Winning In
Many Indias) framework from September 21, 2014. It will essentially change
the sales structure from existing four branch framework to 14 distinct
consumer clusters; each cluster to be led by a new manager. The objective
behind this transformation is to drive sharper execution in smaller markets,
extract better value and throughput from existing coverage (HUVR’s
distribution reach has gone up 3.5x in four years) and drive growth in non-
metro markets.
Valuation and view:
We like HUVR’s focus on improving fundamentals (bigger
and better innovations, cost efficiencies, distribution expansion, WIMI).
However, at 37x and 33.2x FY16E and FY17E EPS, valuations are at substantial
premium to near term averages and hence remain rich, in our view. Maintain
Sell
with a revised target price of INR690 (30x FY17E EPS).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.

Hindustan Unilever
Story in charts
Volume growth grew at 6% in 1Q
Volume growth (%)
14.0
8.3
9.8 9.1 10.0 9.0 9.0
5.0
6.3
4.0
5.0
4.0
6.0
3.0
FMCG sales growth picked up in 1Q15 aided by low base
FMCG Sales Growth (%)
Source: Company, MOSL
Source: Company, MOSL
Benefits of low base no longer available to PP in 2Q15
PP Revenue Growth (%)
19.4 18.2
9.6
11.9 13.3
8.2
13.0 12.1
2.0
11.8 12.4
8.3
S&D division to see price led growth in our view
S&D revenue growth (%)
28.4
14.7
12.8
21.8 20.8
23.7 22.5
19.8
12.6
7.7 6.4 7.1
9.6
12.9
Source: Company, MOSL
Source: Company, MOSL
PFAD prices are down 10.4% QoQ
60,000
50,000
40,000
30,000
20,000
10,000
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
PFAD Price (INR/mt)
LAB prices are up 1% QoQ
150.0
130.0
110.0
90.0
70.0
LAB price (INR/kg)
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
Consistent gross margin expansion
Gross Margins (%)
Competitive intensity picking up sequentially
Advertising & Promotion (%)
13.8
13.1
12.9
12.8
12.7
12.4
12.2
12.2
11.8
11.7
11.6 11.6
11.3
Source: Company, MOSL
24 September 2014
Source: Company, MOSL
2

Hindustan Unilever
Financials and valuations
Income statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
PBT
Tax
Tax Rate (%)
Profit After Taxes
Non-rec. (Exp)/Income
Reported PAT
Change (%)
2012
217.4
12.1
32.9
14.9
2.2
30.7
0.0
2.8
33.5
7.6
22.6
25.9
1.0
26.9
16.7
2013
252.1
16.0
39.4
15.3
2.4
37.1
0.3
6.1
42.9
11.6
27.1
31.3
6.1
37.3
38.7
2014
274.1
8.7
44.8
16.0
2.6
42.1
0.4
6.2
48.0
11.6
24.2
36.4
2.3
38.7
3.7
2015E
308.8
12.7
52.3
16.6
2.8
49.4
0.3
7.3
56.5
16.4
29.0
40.1
0.0
40.1
3.6
(INR Billion)
2016E
348.7
12.9
59.4
16.7
3.1
56.3
0.3
8.7
64.8
20.1
31.0
44.7
0.0
44.7
11.5
2017E
400.9
14.9
68.5
16.7
3.5
65.0
0.3
9.5
74.3
24.5
33.0
49.8
0.0
49.8
11.4
Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
2.2
33.0
35.1
0.0
-2.1
33.0
39.4
-14.2
25.3
2.1
24.5
50.9
25.2
6.8
9.8
9.2
69.8
58.7
11.0
-18.9
33.0
2013
2.2
24.6
26.7
0.0
-2.0
24.7
42.4
-15.8
26.7
2.1
39.6
44.8
25.3
8.3
4.0
7.2
88.4
71.6
16.8
-43.6
24.7
2014
2.2
30.6
32.8
0.0
-1.6
31.2
45.5
-17.4
28.1
3.1
48.4
48.8
27.5
8.2
7.0
6.1
97.2
79.8
17.4
-48.4
31.2
2015E
2.2
35.3
37.4
0.0
-1.7
35.7
49.5
-20.3
29.2
2.5
56.0
54.2
32.5
10.2
5.2
6.3
106.2
87.3
18.9
-52.0
35.7
(INR Billion)
2016E
2017E
2.2
2.2
39.5
43.7
41.6
45.9
0.0
0.0
-1.9
-2.0
39.8
43.8
53.5
58.5
-23.3
-26.8
30.1
31.7
2.5
2.5
59.5
63.8
64.5
76.8
36.7
43.6
14.3
16.5
7.0
10.0
6.5
6.7
116.9
130.9
96.6
109.0
20.4
21.9
-52.4
-54.1
39.8
43.8
E: MOSL Estimates
24 September 2014
3

Hindustan Unilever
Financials and valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
2012
12.0
12.9
16.3
7.5
62.5
63.7
59.2
47.0
7.4
49.1
1.0
84.0
106.9
2013
14.7
15.8
12.4
18.5
125.5
51.8
48.3
61.8
6.4
40.2
2.4
101.1
128.5
2014
16.8
18.0
15.2
13.0
77.3
45.4
42.4
50.4
5.8
35.7
1.7
122.3
151.0
2015E
18.5
19.9
17.3
14.0
75.5
41.2
38.5
44.1
5.2
30.4
1.8
114.3
148.0
2016E
20.7
22.1
19.3
16.0
77.4
37.0
34.6
39.7
4.5
26.7
2.1
113.1
149.3
2017E
23.0
24.6
21.2
18.0
78.2
33.2
31.0
36.0
3.9
23.0
2.4
113.8
155.6
Cash flow statement
Y/E Mar
OP/(Loss) before Tax
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
Others
Extraordinary items (net)
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Other Financing Activities
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
33.5
-2.8
-7.6
-3.1
0.0
1.0
33.9
-1.7
-3.5
-5.2
0.5
0.0
-3.4
-18.8
-21.8
7.0
2.8
9.8
2013
43.5
-6.3
-11.5
-19.0
0.0
6.1
33.4
-3.0
-15.1
-18.1
0.3
0.0
25.2
-46.7
-21.2
-5.8
9.8
4.0
2014
48.0
-6.6
-11.4
-7.9
0.0
2.3
44.6
-4.1
-8.8
-12.9
0.1
0.0
4.1
-32.8
-28.6
3.1
4.0
7.0
2015E
56.5
-7.6
-15.8
-1.8
0.0
0.0
60.0
-3.4
-7.6
-10.9
0.0
0.0
-15.5
-35.4
-50.9
-1.8
7.0
5.2
(INR Billion)
2016E
64.8
-9.0
-19.4
-2.2
0.0
0.0
70.0
-4.0
-3.6
-7.6
0.0
0.0
-20.2
-40.5
-60.7
2017E
74.3
-9.8
-23.8
-4.8
0.0
0.0
80.1
-5.0
-4.3
-9.3
0.0
0.0
-22.2
-45.5
-67.7
1.7
3.0
5.2
7.0
7.0
10.0
E: MOSL Estimates
24 September 2014
4

Hindustan Unilever
NOTES
24 September 2014
5

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Hindustan
inducement to
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Unilever
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Analyst ownership of the stock
HINDUSTAN UNILEVER LTD
No
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6