2 June 2017
Hindustan Unilever
BSE SENSEX
31,273
S&P CNX
9,654
Update
| Sector: Consumer
CMP: INR1,087
TP: INR1,215(+12%)
Strengthening the Core
Higher premiumization to drive earnings
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
Y/E Mar
2017
2018E
2019E
HUVR IN
2164.246
1101 / 783
13/11/9
1937.3
28.9
1208
32.8
Net Sales
EBITDA (Rs b)
Net Profit
EPS
EPS Gr. (%)
BV/Sh. (INR)
P/E (x)
P/BV (x)
RoE (%)
RoCE (%)
313.0
60.5
42.5
19.6
1.9
30.8
55.4
35.3
65.6
87.3
348.3
70.0
49.3
22.8
16.1
31.8
47.7
34.2
72.8
96.6
395.0
82.3
58.4
27.0
18.4
33.6
40.3
32.4
82.5
109.6
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Mar-17 Dec-16 Mar-16
67.2
5.7
13.3
13.9
67.2
5.8
13.1
13.9
67.2
4.8
14.2
13.8
We attended HUVR annual investor meet 2017. Following are the key takeaways:
Clear focus on thought leadership far ahead of peers and improving
accessibility of their core brands in each segment.
Far more emphasis on premiumization across segments than earlier.
Strengthening the Naturals portfolio across segments keeping
Lever Ayush
as
the master brand in addition to other specific natural brands like Indulekha,
St’ Ives and the new skin and hair brand Citra.
Zero based budgeting across all areas will we believe yield far more in terms
of margins than we had anticipated, particularly when allied with strong
premiumization.
Increase in sampling and sachets to drive market development of premium
products and formats of the future.
Building strong capabilities across channels.
A confluence of positives including expectations of normal monsoon,
moderate inflation, government schemes aiding consumption growth, weak
base of the past three years, end of commodity price deflation, continued
premiumization, and cost savings is leading to outlook for rural-focused
companies being brighter than in the past few years
For HUVR, the salience of rural sales is one of the highest, brand portfolio is
the widest, and distribution reach is the broadest among peers, making it
uniquely positioned to take advantage of the confluence of positive factors.
We expect earnings CAGR of 17% over FY17-19, far superior than the 6-11%
for the past 3/5/10 years. This along with best-of-the-breed return ratios and
dividend yield justifies HUVR’s premium valuations. The stock trades at 40x
FY19E EPS. We reiterate Buy with a price target of INR1,215 (45x FY19E EPS;
5% premium to 3-year average).
FII Includes depository receipts
Stock Performance (1-year)
Hind. Unilever
Sensex - Rebased
1,150
1,050
950
850
750
Delivery and Strategy going forward:
FY17 was a challenging year with
markets remaining subdued (urban and rural), commodity cost inching up and
extreme climatic conditions. In the latter half of the year when the markets
were just witnessing an uptick in demand, demonetization pulled the demand
back. Even in this tough environment HUVR has delivered a resilient
performance of 4% USG and 1% UVG with 40bp improvement in margins.
Going forward things looks even more positive for rural-focused consumer
companies like HUVR than in the past four years (“Juggernaut
moves
forward”).
For the company’s core strategy remains the same but with
renewed focus.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Company name
Key thrusts for the future are:
Strengthening the Core brands (Surf
Excel, Lux, Red Label, Kissan, Vim
and
Dove):
The core portfolio for HUVR is distinctive for different parts of India.
Apart from gaining market share, the key focus is on making the core business
aspirational, increasing the size of the pie and lead market penetration. Every
12-24 months, company looks to renovate or innovate the brands to make it
relevant and aspirational. They have been investing behind market development
to increase its size and also making it more sustainable. Categories like male
grooming, hair conditioners, cleaning liquids, fabric conditioners, hand wash and
face wash are witnessing strong double digit growths led by market
development efforts by HUVR. With greater reach across channels the company
is in a better position to lead the market and gain share across categories.
Accelerating premiumization across categories:
Company is looking to
accelerate the process of premiumization across categories and brands. By
premiumizing the company offers higher order benefits at a higher price.
Premiumization in detergents is far more important compared to other
categories due to the 100% penetration levels. The premium brands (Rin + Surf
Excel) have been growing ahead of the market for HUVR and still there is huge
scope as only 1 in 10 washes in India uses a HUVR premium laundry powder.
‘Matics’ has been another big success. Unlike detergents, premiumization has
been slower in soaps as liquid soaps and body wash gels are still very small as of
now. In the skin care segment company is also looking to accelerate the through
trend setting innovations across brands like Ponds, Lakme and Fair & Lovely. E.g.
for premiumisation – Introduced water saving detergent bar that delivers
superior brightness. In dish wash the company has introduced Vim bar with
Pudina to fight grease and smell and in detergents Wheel has been fortified with
lemon. In skin care, introduced weightless mousse.
Strengthening the Naturals Portfolio:
Company has now built a strong naturals
portfolio based on expertise & efficacy through the existing brands (Tresemme,
Clinic plus, Vim
and
Fair & Lovely)
as well as extending their presence in new/
recent Ayurvedic brand (Ayush,
Indulekha, St. Ives
and
Citra).
Company is now
looking to strengthen its natural portfolio using existing brands, building Ayush
as the master brand (will be rolled out across the country from just South India
as of now, where it has received excellent response) and also bringing specialist
brands (Indulekha - Ayurvedic medicinal hair oil brand and Citra – mainly
focused on skin care, using natural herbs from ASEAN and Japan, price
positioning at a premium to Ayush) in the market place.
Zero based budgeting (ZBB) & Symphony to drive savings:
ZBB which is a 6-
stage approach for driving sustainable cost reduction by changing the mindset
of the employees. Symphony program (for end to end value chain) is an
organization wide engagement to drive savings in material costs, non-material
costs, marketing & trade spends and overheads. This will help reduce any cost
which doesn’t add value. There was a 1.5x increase in savings from 2014 to 2016
through these programs. We think that ZBB across all areas will yield far more
on margins than what the market was expecting earlier particularly when it ends
up questioning all set practices of the company. The company has identified 5
out of its 29 factories for implementation of first stage of ZBB. Assuming overall
costs were 100 as much as 45 was identified as non- value added. Of the 45, ~16
2
2 June 2017

Company name
were targeted for culling and savings are being made on 12. There has also been
healthy improvement in inventory days through robust sales and operations
planning, optimization of networks and learnings from other industries.
Increasing use of Sampling and sachets:
Company has been increasing the use
of science based sampling across categories for market development. This has
helped company drive trials of their products and thus better growth. Product
experience has been elevated through the use of food ambassadors, dry
sampling (small SKUs free with a large one) and partnering (giving samples with
other FMCG company’s products). Access packs CAGR growth in case of foods
for example has increased from 30% in 2012 to 100% by 2016.
Building strong capabilities across channels:
Company is strengthening the
existing channels (Wholesale, General trade [GT] and Pharmacy) by increasing
number of stores for its products, more assortment across stores and increasing
frequency of refill. Technology and talent will play a key role in effective
coverage and increasing throughput from current store. Technology is helping
company to make tailor made assortment for every store. Apart from the
traditional channels, it has been building channels of the future (Modern trade
and E-commerce) to be present across all relevant channels for consumers and
also be in top in that channel. The market share for HUVR in e-commerce is
higher than Modern trade (MT) and the market share in MT is higher than in GT.
If GT market share is 100, MT is 118 and e-commerce is 130-140. Management
believes they can sustain this advantage over peers because of wider product
offerings, their leading brands appearing earlier on screens, focusing on better
presentation for faster conversion, ahead of time skills developed on
ecommerce and modern trade and learning’s from Unilever’s global experience.
Valuation and view:
We expect HUVR to report 17% PAT CAGR over FY17-19
against 6.1% CAGR in the last three years, 10.6% CAGR in the last five years and
10.7% CAGR in the last 10 years. Valuations are not cheap at 40.1x FY19E EPS,
but we believe that given the potentially strong earnings growth, premium
valuations are justified, particularly as return ratios and dividend yield remain
best of the breed. We had upgraded the stock to BUY after the strong 4QFY17
results. We maintain our Buy rating and target price of INR1,215 (45x FY19E EPS;
5% premium to 3-year average).
Exhibit 1: Changes to the model have resulted in 1.6%/4.3% change in FY18/FY19 EPS
New
Sales
EBITDA
PAT
FY18E
354,778
69,997
49,312
FY19E
402,179
82,323
58,367
FY18E
354,778
68,910
48,556
Old
FY19E
398,676
78,893
55,973
FY18E
0.0%
1.6%
1.6%
Change
FY19E
0.9%
4.3%
4.3%
Source: Company, MOSL
2 June 2017
3

Company name
Other key highlights from presentations by divisional heads
GST
Implementation of GST is a business project and will have significant impact
across value chain for all companies. Areas like procurement, manufacturing,
distribution, customer development, accounting, controls, taxation and IT will
have significant impact. The company is working upon 100 business
whitepapers.
Currently the company is in the phase of IT readiness which is the most
important phase.
It is also working with the eco-system to be compliant by 1
st
of July and this
engagement will only increase in coming days.
Compliance for companies will become simpler and effective after the initial
phase. This will lead to a level playing field and efficient supply chain operations.
Consumer likely to see cheaper and better products after GST implementation.
Soaps, toothpastes and detergent bars have seen lower rates under GST. The
net benefits of lower GST rates (on soaps, toothpastes and detergent bars and
of 100% input credit will be passed on to the consumer.
In terms of P&L, turnover and margins are likely to see changes as there will be
interplay between line items. Once all clarifications are received the company
will hold a separate session on GST accounting as there will be implications on
multiple line items.
In terms of trade channel, the company is conducting extensive communication
to clarify that the trade will be compensated appropriately.
Home Care
Premiumization under Home Care: 40% of water used in a household is for
laundry purpose; so introduced Rin (with half water usage but same shine) to
drive premiumisation and sustainability. One and a half years ago the company
introduced Surf Excel Liquid Matic to drive premiumisation. In dish wash,
introduced anti smell dishwash bar under Vim.
Developing formats of the future (fabric conditioner and dish wash liquids)
through education and sampling along with strengthening of the core portfolio.
Refreshments
HUL grew ahead of the market in the refreshments portfolio in FY17. The
segment grew by 8% USG even in the demonetization impacted quarter of
Decemeber’16.
In instant coffee, HUVR has been the volume leader for last 2 years and has now
become the value market leader as well. Coffee penetration in India is only 20%
of which only 25% (5% of overall coffee market) is instant coffee.
In its core portfolio (which is mainly tea and some part of Southern coffee
business), company will introduce better products through the use of science.
Tea, despite fairly high penetration only reaches around half of the total outlet
reach of HUL in India.
Company sees immense opportunity in the tea business as 40% of the tea is still
sold loose, only 1% of tea in India is sold in tea bags and value added tea are
currently exploding in India. In the fast growing category of Green Tea, it has
4
2 June 2017

Company name
doubled its market share to ~40% in a category that has grown by 30% in the
last 3 years. In terms of accessibility there is huge scope as tea only reaches half
of HUVR covered outlets.
Initiatives like Taj Mahal tea house and massive physical sampling of coffee to
convert customers to instant coffee in South India will help develop the market
going forward.
Personal care
Personal care business has a lot of heritage and is the crown business of HUVR.
It is the 2nd largest personal care business for Unilever globally.
HUVR has led the development of personal care market in India. HUVR made
consumer move from water to shampoo and now from shampoo to
conditioners.
There is still headroom to grown in the various personal care categories if
compared to Indonesia. Even if Per Capita Consumption of these categories
reaches Indonesia’s levels the growth opportunity is high at 1.6x the market in
personal wash, 2.7x in face creams, 2.6x in shampoos, 4x in deodorants and 2x
in toothpastes.
It aims to make its core brands aspirational by re-launching, premiumizing and
introducing new formats. For eg. It re-launched Sunsilk last year which resulted
in the brand reaching highest market share in last 7 years.
Premiumizing the category along with market development through trend
setting innovations in all categories.
Using sampling to drive trails of the brands.
Using Naturals platform based on expertise and efficacy.
Entering emerging segments such as the INR10b baby care segment.
Penetration of baby care products is only 1% in India with even urban India as
low as 2%.
Personal care business sales from e-commerce in India are already the fifth
largest among all countries for Unilever worldwide.
Foods
In the foods portfolio the core business (Ketchups, Soups and Jams) have grown
profitably.
The penetration levels of Soups and ketchup are still low with 6% and 24%
respectively.
Company intends to drive penetration through access packs, sampling and Adda
model. CAGR sales growth from access packs was 100% in CY16 from 30% in
CY12.
The company is banking on emerging trends of fragmented meals (a diversion
from 3 course meal), international cuisines and health & wellness.
This year’s thematic presentation was on Supply Chain
A few key highlights from initiatives on supply chain in recent years have been
38% reduction in defects per million units over the past year, 96-97% distributor
case fills last year, 8% inventory days reduction between 2013-2015 and 5%
reduction in the past year due to efforts on robust sales and operations
planning, optimization of networks and learning’s from other industries.
5
2 June 2017

Company name
There has been 1.5x increase in savings over the past two years.
The company is committed that there is no holy cow that they will not question
when discussing savings with each category heads.
Out of 29 factories, 5 have been identified as part of the first phase of savings.
Assuming total costs as 100, 45 have been identified as non-value added
through ZBB. Some of these can be practically reduced which is around 16 and
12 is being culled.
Use of Big Data and democratization of data is enabling faster decision making.
Exhibit 2: HUVR has built 11 brands which are more than INR5b value
Source: Company, MOSL
Exhibit 3: Outlook looks positive
Source: Company, MOSL
2 June 2017
6

Company name
Exhibit 4: Building categories for sustainable growth
Source: Company, MOSL
Exhibit 5: Presence at each price point; huge scope of premiumization
Source: Company, MOSL
Exhibit 6: After having built a Naturals portfolio company now looks to strengthen it
Source: Company, MOSL
2 June 2017
7

Company name
Financials and valuations
Income Statement
Y/E March
Net Sales
Other Oper. Income
Total Revenue
Change (%)
COGS
Gross Profit
Gros Margin (%)
Operating Exp
% of sales
EBIDTA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income - Recurring
Profit before Taxes
Change (%)
Margin (%)
Tax
Deferred Tax
Tax Rate (%)
Profit after Taxes
Change (%)
Margin (%)
Non-rec. (Exp)/Income
Reported PAT
FY14
274,083
6,108
280,191
8.6
143,436
136,755
48.8
92,003
32.8
44,753
11.8
16.0
2,606
360
6,210
47,997
10.4
17.5
12,196
248
25.9
35,553
11.5
13.0
3,122
38,675
FY15
301,705
6,351
308,056
9.9
156,236
151,821
49.3
99,738
32.4
52,082
16.4
16.9
2,867
168
6,184
55,231
15.1
18.3
19,060
-338
33.9
36,510
2.7
12.1
6,643
43,153
FY16
304,990
5,619
310,609
0.8
153,053
157,556
50.7
100,070
32.2
57,487
10.4
18.5
3,208
150
5,640
59,769
8.2
19.6
18,160
-70
30.3
41,679
14.2
13.7
-310
41,369
FY17
312,980
5,920
318,900
2.7
156,850
162,050
50.8
101,580
31.9
60,470
5.2
19.0
3,960
220
5,260
61,550
3.0
19.7
18,650
410
31.0
42,490
1.9
13.6
2,410
44,900
FY18E
348,266
6,512
354,778
11.3
172,565
182,213
51.4
112,216
31.6
69,997
15.8
19.7
4,611
242
5,808
70,953
15.3
20.4
21,144
497
30.5
49,312
16.1
14.2
0
49,312
(INR Million)
FY19E
395,015
7,163
402,179
13.4
192,913
209,266
52.0
126,943
31.6
82,323
17.6
20.5
4,818
242
6,718
83,982
18.4
21.3
25,027
588
30.5
58,367
18.4
14.8
0
58,367
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investment in Subsidiaries
Current Investments
Deferred Charges
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
FY14
2,163
30,608
32,771
32,771
41,706
-17,409
24,298
3,121
6,362
24,580
1,617
70,007
27,475
8,164
22,210
12,158
97,214
49,115
30,558
17,540
-27,206
32,771
0
(INR Million)
FY15
2,164
35,084
37,248
37,248
44,306
-19,731
24,575
4,790
6,541
26,238
1,960
72,236
26,027
7,829
25,376
13,005
99,093
48,515
29,828
20,749
-26,857
37,248
0
FY16
2,164
60,627
62,791
62,791
50,774
-21,627
29,147
3,860
3,190
24,606
1,680
76,509
25,284
10,645
27,590
12,990
76,201
54,980
12,381
8,840
308
62,791
0
FY17
2,164
64,489
66,653
66,653
65,827
-25,587
40,240
2,030
2,540
35,190
1,600
65,130
23,620
9,280
16,710
15,520
80,077
60,060
11,297
8,720
-14,947
66,653
0
FY18E
2,164
66,625
68,789
68,789
67,827
-30,198
37,629
2,030
2,540
35,690
1,600
72,824
29,766
12,331
14,708
16,020
83,524
61,438
12,427
9,659
-10,700
68,789
0
FY19E
2,164
70,496
72,660
72,660
69,827
-35,016
34,811
2,030
2,540
37,690
1,600
94,457
31,165
13,986
29,649
19,658
100,469
75,993
13,669
10,806
-6,012
72,659
0
2 June 2017
8

Company name
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
FY14
16.4
17.6
15.2
13.0
79.1
439
FY15
16.9
18.2
17.2
15.0
88.9
501
FY16
19.3
20.7
29.0
16.0
83.1
511
FY17
19.6
21.5
30.8
17.0
86.6
593
FY18E
22.8
24.9
31.8
19.5
85.6
701
FY19E
27.0
29.2
33.6
23.5
87.1
66.1
61.6
8.5
51.9
71.7
1.2
64.4
59.7
7.7
44.5
63.1
1.4
56.4
52.4
7.6
40.4
37.5
1.5
55.4
50.6
7.5
38.6
35.3
1.6
47.7
43.6
6.7
33.4
34.2
1.8
40.3
37.2
5.9
28.2
32.4
2.2
119.5
141.6
1,947.5
11
8.4
104.3
140.6
4,018.2
9
8.1
83.3
108.5
263.8
13
4.9
65.6
87.3
106.1
11
4.7
72.8
96.6
95.8
13
5.1
82.5
109.6
122.5
13
5.4
0.0
0.0
0.0
0.0
0.0
0.0
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Depreciation
Interest Paid
Direct Taxes Paid
(Incr)/Decr in WC
CF from Operations
Extraordinary Items
(Incr)/Decr in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Invest.
Change in Networth
change in equity
change in reserves
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
FY14
47,997
-6,210
2,606
360
-12,196
8,638
41,195
3,122
-3,981
37,213
-7,635
-8,494
85
0
85
-32,730
5,075
-27,570
5,131
17,079
22,210
FY15
55,231
-6,184
2,867
168
-19,060
2,816
35,839
6,643
-4,269
31,569
-1,838
536
137
1
136
-38,812
5,467
-33,208
3,166
22,210
25,376
FY16
59,769
-5,640
3,208
150
-18,160
-24,950
14,377
-310
-5,537
8,839
4,983
-864
25,752
0
25,752
-41,578
4,528
-11,298
2,214
25,376
27,590
FY17
61,550
-5,260
3,960
220
-18,650
4,375
46,195
2,410
-13,223
32,972
-9,934
-20,747
2,002
0
2,002
-43,040
4,710
-36,328
-10,880
27,590
16,710
FY18E
70,953
-5,808
4,611
242
-21,144
-6,249
42,604
0
-2,000
40,604
-500
-2,500
2,193
0
2,193
-49,369
5,070
-42,106
-2,002
16,710
14,708
(INR Million)
FY19E
83,982
-6,718
4,818
242
-25,027
10,253
67,549
0
-2,000
65,549
-2,000
-4,000
5,000
0
5,000
-59,496
5,888
-48,608
14,941
14,708
29,648
2 June 2017
9

Disclosures
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2 June 2017
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