Prabhudas Lilladher Research Report – Hindustan Unilever
We are upgrading Hindustan Unilever to Buy (earlier Accumulate) and increase FY18 and FY19 EPS estimates by 6‐10% following improved growth visibility. We expect sustained improvement in volume growth and margin expansion as a part of Unilever’s global drive to boost EBIDTA margins to 20% by 2020. Although GST is likely to provide temporary disruption in 1HFY18, HUL is best placed to capture demand growth in “India and BHARAT” given 1) strong portfolio across price points to capture Premiumisation led growth 2) right to win in emerging categories like Premium Detergents, fabric conditioners, hand wash, Liquid dish wash, Hair conditioner, Facewash and Green tea etc. 3) significant expansion in distribution in north and central Indian states having low penetration 4) strong push with Ayush, Indulekha, existing and new brands in fast growing herbal segments. We now estimate 60bps margin expansion in FY18 and 100bps in FY19 as HUVR gains from higher volumes and operating efficiencies in production, distribution, logistics and Adspends. We estimate 18% PAT CAGR over FY17‐19 and value the stock at 40x Sept19 EPS and arrive at 18‐month price target of Rs1204 (Rs1094 earlier).
Concall Takeaways: 1) Demand has shown steady improvement, however disruption in wholesale channel following GST can have 100‐150bps impact in pipeline inventory in 1QFY18 2) Input costs are benign and sales promotions have been significantly curtailed across segments 3) HUL has seen significant gains in premium brands like Surf, Dove, lakme and Pears enabling margin expansion 4) Ayush (mass positioning) launch will be extended to pan India given success in 5 southern states 5) HUL will pass on gains from any tax reduction in GST, however efficiency gains will be retained by the company 6) Assam Unit has started production and HUVR expects 50 bps reduction in tax rates in FY18 7) Naturals segment in toothpaste is 25% of the market, HUL has launched 3 herbal toothpastes under the Ayush brand and has re‐launched Close‐up to stem decline in market share 8) HUVR will rationalise adspends by improving effectiveness, reducing number of campaigns, duration and use of emerging platforms and data analytics to reduce costs.
Volumes up 4%, EBIDTA margins expand 90bps: Net sales increased by 6.7% (est 3%) enabled by 4% volume growth (est‐1.5%). Gross profit grew 6% as margins declined by 30bps YoY (40bps QoQ), EBIDTA margins expanded by 90bps (est 50bps) as Adspend was reduced by 80bps (1.4% decline). EBIDTA grew by 12.1% to Rs 16.5bn (est 15.5b). Pipeline filling is estimated to have contributed 100bps to volume growth in 4QFY17
Financial income declined by 17.8%, 140bps decline in tax rate to 26.9% resulted in 11.3% growth in Adj PAT to Rs11.8b (est Rs11.1b). The Adj PAT includes the income tax refund of Rs650m in 4QFY17 and Rs610mn in 4QFY16, adjusting for this the profit is in line.
Home Care sales increased 7.4%, EBIT increased 28.7% as margins expanded 210bps. Surf continued to lead Premiumisation in Detergents.
Personal care sales increased 8%, EBIT increased 9% on 20bps higher profit margins. Growth was led by Pears and Dove and FAL re‐launch.
Refreshments reported 10.5% sales growth, EBIT increased by 12.7% on 30bps higher margins. Tea sustained double digit growth while Bru Gold drove growth in premium coffee.
Packaged foods sales grew 2.4%, EBIT declined 26% to Rs280m on 370bps margin decline. This includes impact of Modern Foods sale last year.
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