30 April 2013
Update |Sector: Consumer
Hindustan Unilever
CMP: INR 498
TP: INR 475
Neutral
S&D leads the positive surprise; exceptional pipeline filling adds
80bps to volume growth; Neutral
(HUVR IN, Mkt Cap USD19.8b, CMP INR498, TP INR475, 5% downside, Neutral)
-
HUVR’s 4QFY13 results were marginally above est with revenue growth of 12.1%
to INR64.6b (est INR63.3b). EBITDA margins came in at 15% (est 14.9%), while
Adj PAT for the quarter stood at INR7.8b, up 17.7% (est INR7.2b). Strong double
digit volume growth in S&D, squeeze in other expenses and significant margin
expansion in Beverages portfolio were the key positive surprises.
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Volumes grew 6.3% (est 5.5%) led by strong double digit growth in key Soaps
and Detergents brands, Hair and Oral Care portfolio. However, adjusting for the
inventory loading prior to transporter’s strike in April, volume growth would
have been 5.5%, in line with our estimates.
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Gross margin expanded 110bp to 46.9% on account of lower raw material cost.
Despite higher ad‐spends (up 95bps), saving in overheads led to EBIDTA margin
expansion of 50bp to 15%. Other expenses as a percentage of sales stood at
multi‐year low.
-
51% increase in other income and lower than est tax rate of 22.7% (est 25.8%)
led to Adj PAT growth of 17.7% to INR7.8bn (est INR7.27bn).
-
Soap and Detergent sales grew 12.6% while EBIT increased 19.7%, margins
expanded 70bp to 12% (est 11.7%). Premium and popular Laundry reported
robust double digit volume growth.
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Personal products sales grew 12.1%, while margins contracted 210bps YoY to
25.8% led by higher ad spends and mix deterioration as Skin Care segment
posted anemic performance.
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Board has proposed final dividend of INR6/share – total INR18.5/share
(including INR8/share special dividend) for FY13 vs. INR7.5/share in FY12.
Valuations & view: We are revising our earnings estimates up ~2%. The recent
modest QoQ pick up in volume growth led by promotions notwithstanding, we
expect it to remain under pressure in the near term owing to a) normalization of
trade inventory build‐up and b) continued moderation in discretionary Personal
care and Foods categories. We also expect lower support from pricing in FY14 as
input cost environment is decisively more benign. Combination of royalty rates
impact (~50bps) and higher tax rates (up 250‐300bps) restricts our EPS CAGR for
FY13‐15E to 10.2% (8.2% earlier). Maintain Neutral with a TP of INR 476 (26x
FY15 EPS). Sharp slowdown in rural spending and spike in competitive intensity
constitute key risks.
1

Hindustan Unilever
4Q Volumes up 6.3%; Gross Margin expands 110bp YoY; despite increase in ad
spends EBITDA margins expand 50bp
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Sales grew 12.1% to INR 64.6b, led by volume growth of 6.3% (est 5.5%).
Domestic FMCG business grew 13.1%, with HPC growing at 12.7% and Foods
reporting a growth of 15.1%.
-
Volume growth for the quarter came in at 6.3% led by strong double digit
volume growth in key Soaps and Detergents brands, Hair and Oral Care
portfolio. However, adjusting for the pipeline filling prior to transporter’s strike
in April, volume growth would have been 5.5%, in line with our estimates.
-
Management highlighted weak consumption trends in discretionary segments
and modern trade channel. Rural and urban growth has now converged, as per
management.
-
Gross margin expanded 110bp to 46.9% on account of lower input costs and
some carry over benefits of earlier price hikes.
-
Ad‐spends increased 95bp YoY to 12.7% ‐ management pointed towards rising
competitive intensity in Laundry category and its efforts to spruce up the
volume growth in Wheel, initiated at the fag end of 3Q13.
-
EBITDA increased 16.6% to INR 9.7b (est INR9.4b) as margins expanded 50bp to
15% (est 14.9%). Higher ad spends (up 95bp) were offset by savings in other exp
(down 50bp) and flat staff costs.
-
We note that other expenses as a percentage of sales is now at multi‐year low.
This is despite the 30‐35bps impact on account of recent increase in royalty
rates.
-
Financial other income increased 51% YoY to INR 1058m due to higher cash and
dividends.
Adj PAT increased 17.7% to INR 7.8b, partially aided by lower than est tax rate.
Tax rate for the quarter stood at 22.7% up 90bp (est 25.8%)
30 April 2013
2

Hindustan Unilever
Domestic FMCG sales up 13%
Volume growth driven by strong double digit growth in S&D
Gross and EBITDA margins expand 110bps and 50bps, resp
ASP up 95bps YoY; competitive intensity rising in HPC
Soaps and detergents margins expand 70bp YoY; PP margins down 210bp YoY
‐
Soaps and Detergent: Sales grew ~12.6%, primarily double digit volume growth
in Dove, Lux, Lifebuoy, Surf and Rin. Margins expanded 70bp YoY to 12 % due to
benefit from easing raw materials prices and better product mix.
Both premium and popular brands such as Dove, Lux, Lifebuoy and Surf and Rin
grew double digits volumes.
S&D sales driven by volumes; margins up 70bps
PP performance remains weak; margins contract 210bps YoY
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Personal Products: Sales grew 12% led by double digit growth in Skin, Oral and
Hair care. F&L pricing transition continues to impact Skin Care. Management
mentioned it has retained market shares in the segment. PP margins declined
210bps YoY to 25.8% due to combination of a) Higher ad spends b) Higher
royalty rates and c) mix deterioration due to underperformance of Skin Care.
3
30 April 2013

Hindustan Unilever
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Segmental snapshot;
Beverages: Sales grew 18.3% with double digit growth in all key Tea brands and
healthy performance from Coffee. EBIT grew 38.4% as margins expanded 250bp,
a key surprise in 4Q13 results.
Processed Foods:
Sales continued to be impacted by prevailing weak
consumption trends in the category and posted a modest 7 % growth led by
Kissan, Knorr which posted double digits growth. Kissan posted 14th consecutive
quarter of double digit growth. HUVR posted operating profit of INR 140mn vs.
EBIT losses of INR37mn in base quarter and INR26mn loss in 3QFY13.
Raw material prices show mixed trend; Pal oil benign, Tea prices rising
-
PFAD prices are off 45% YoY driving margin expansion in Soaps and Detergents
portfolio.
-
Tea price have moved up and is expected to impact Beverages margins going
ahead.
PFAD prices down 45% yoy
LAB prices remain firm
30 April 2013
4

Hindustan Unilever
S&D revenues up 12.6% led by healthy volume growth
PP revenue growth at 12%
Conference call highlights
-
FMCG sector grew in Mar‐13 but moderation in value and volume was observed
across FMCG categories, especially in Modern Trade and discretionary
categories.
-
Volume growth of 6.3% included up‐stocking related to transporter’s strike in
April, adjusted for which, volume growth would be 5.5%. Thus, total 80bps
impact on account of inventory fill up prior to strike.
-
Royalty impact in 4Q
‐
30‐35bps for the quarter. Can be slightly higher in
Personal Products segment.
-
Soaps – pricing flat to lower – Lux, Lifebuoy & Dove posted double digit volume
growth
-
Detergents
‐
Surf & Rin double digit volume growth, Wheel showing
improvement after trade actions initiated last quarter.
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Skin Care – Significant slowdown in growth but double digit growth in Lakme +
Ponds. F&L holding on to shares. No timeline on when situation can reverse.
-
Hair Care – volume led double digit growth.
-
Weakening consumer sentiment due to high CPI – leading to slowdown in
discretionary categories.
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Fewer new stores opening – store closures in Modern Trade.
-
Pricing growth is tapering.
-
Dove and Ponds –became INR10bn brand each in FY13.
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Detergents – seeing pick‐up in competitive intensity.
-
Segmental margins – PP margins down due to higher ad‐spends coupled with
mix deterioration (slower growth in Skin). Most of the contraction in margins is
due to ad‐spends.
-
Other expenses as % of sales is at multi‐year low – reduction in costs related to
overheads, distribution and supply chain.
Change in estimates: Upgrade estimates ~2%
‐
We upgrade our estimates marginally. We now forecast 10.2% EPS CAGR over
FY13‐15E vs. earlier estimate of 8.2% CAGR.
ESTIMATES: ~2% earnings revision
30 April 2013
5

Hindustan Unilever
FY13 (12 MONTHS) performance highlights
-
Revenue grew ~17% to INR 258b with volume growth of 7%.
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EBITDA margins expanded 60bp to 15.5%, while PBT grew ~30%.
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Despite 360bp increase in tax rate to ~27%, 2.6 x increases in other income to
INR 6.06b resulted in PAT growth of 28% to INR33.1b.
-
Net cash from operating activities grew 23% to INR35.3bn
-
HUVR declared INR18.5 dividend for FY2013 (INR7.5 in FY12) including
INR8/share as special dividend.
FY13 category‐wise growth details
Valuation and View: Volume growth concerns still remain; maintain NEUTRAL with
revised TP of INR 475
-
The recent modest QoQ pick up in volume growth led by promotions
notwithstanding, we expect it to remain under pressure in the near term owing
to a) normalization of trade inventory build‐up and b) continued moderation in
discretionary Personal care and Foods categories. Our channel checks indicate a
weak April performance.
-
While benign input costs can result in higher competitive intensity, as already
witnessed in Laundry, HUVR is better prepared today to handle the same vs
CY09‐10.
-
We maintain our NEUTRAL rating on HUVR with a revised TP of INR475 (26x
FY15). Spike in input costs and slowdown in rural consumption are key downside
risks while market’s willingness to ascribe continued premium multiples for
defensive stocks is key upside risk.
30 April 2013
6

Hindustan Unilever
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30 April 2013
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