Annual Report Update
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Equity Shares (m) 2,177.5 FY10 Annual Report Analysis
52-Week Range (Rs) 306/218 Competitive landscape challenging; margins to remain under pressure
1,6,12 Rel. Perf. (%) -2/-5/-35
Hindustan Unilever's (HUL) FY10 annual report signifies heightened competitive activity
M.Cap. (Rs b) 566.1
and its strong response to it to drive long term growth. We present the key takeaways:
M.Cap. (US$ b) 12.1
Increase in commodity costs and food inflation has created an inflationary operating
environment. In FY10, FMCG markets grew at a slower pace than in FY09.
ANNUAL REPORT 2009-10
Strong growth potential and a slowdown in developed economies resulted in the
entry of new players and increased aggression by existing MNCs. The resultant
competitive intensity led to aggressive pricing action, and media and trade spend.
HUL has taken multi-pronged initiatives to defend its leadership through innovation,
right pricing and competitive media spends.
HUL continues to invest in new categories such as deodorants, hair conditioners,
surface cleaners and soupy snacks.
HUL has significantly invested in supply chain capability aiming to increase rural
and urban distribution.
HUL re-launches major brands to regain lost ground: HUL went through a major
re-launch exercise in FY10 as major brands like Wheel, Rin, Lux, Lifebuoy, Breeze,
Liril, Pepsodent, Clinic Plus and Fair and Lovely were re-launched. The re-launch of
some brands was backed by pricing corrections (Rin and Lifebuoy), and the re-
launch of others was led by product formulation changes (Wheel, Liril and Lux).
SHAREHOLDING PATTERN % (MAR-10)
Working capital declines Rs12b; higher capex impacts RoCE: Streamlining of
Others Promoter the supply chain has reduced the "decision to execution cycle" time, which lowered
19.1 52.0 the inventory by Rs4b. Net working capital (as a percentage of sales) declined from
-13% to -17% due to a Rs10b increase in payables and inventory reduction. A capex
of Rs7b (including a new corporate office) lowered RoCE by 680bp.
Valuation and view: near term volumes at cost of margins; Neutral: HUL's
Foreign near term volumes are likely to come at a cost to margins as rising input costs and
media inflation will necessitate price increases. We tweak our earnings model to
Dom. Inst factor-in changes in the volume-price mix and input cost pressure. We now estimate
14.1 FY11 gross margin decline of 150bp (170bp earlier) and EBITDA margin decline of
120bp (180bp earlier) and expansion of 70bp in FY12. We estimate EPS of Rs9.6 for
FY11 and Rs11.3 for FY12, below the consensus average of Rs10.6 and Rs11.9. The
STOCK PERFORMANCE (ONE YEAR)
stock trades at 27x FY11E and 23x FY12E EPS, which is expensive. Neutral.
Sensex - Rebased Financial & valuation summary
* EPS for 12 months (April 08-March 09)
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+9122 39825404/Nikhil Kumar (Nikhil.N@MotilalOswal.com); Tel: +922 39825120
Inflationary headwinds hit FMCG sector
"The increased levels of inflation have had a somewhat dampening impact on the
market growth of some of categories, particularly in the second half of the year".
DOUBLE DIGIT FOOD INFLATION (%) FOOD COMPRISES ~40% HOUSEHOLD SPEND
20 Education, Misc.
15 16.5 Food
Furinishing Apparel Rent, Utilities
4% 5% 12%
We note that ~40% of the average Indian household's expenditure is on food and this
proportion increases for lower income classes. Over the past 12 months the proportion
has increased due to food inflation. This has impacted buying power among lower income
households in rural and urban India, resulting in downtrading in beverages and food.
Stiffer competition takes a toll on pricing power
"The strong growth potential of the Indian market has attracted many new competitors
resulting in a substantial increase in competitive intensity across categories. This
has resulted in aggressive pricing action as well as heightened media and trade
Global FMCG majors are Competitive intensity in the Indian FMCG space has increased due to the prominence of
making a beeline for the Indian consumer market. Major MNCs that have increased their product launches/
capturing a slice of high pricing actions include P&G, J&J, PepsiCo, L'Oreal, Reckitt Benckiser and Beiersdorf.
growth Indian market Besides, players like Kraft and Danone are expected to expand their portfolio. We highlight
that the impact is being felt on different fronts like product pricing, adspends and promotions,
which can impact profit margins.
PRICE CORRECTIONS ACROSS KEY SOAP AND DETERGENT BRANDS
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
120 114 120
100 100 100 100 100 100 100
94 100 92
90 90 75 71 69
Lux Lifebuoy Breeze Wheel Pow der Wheel Bar Rin Advanced Surf Excel Bar
13 July 2010 2
Soap, detergents slip; personal products support margins
HUL's FY10 volumes grew ~5% (FY09 adjusted for 12 months). Segmental volume
growth is unascertainable due to the base of 15 months in FY09. In FY10, soaps and
detergents posted value growth of 1.5% YoY and personal product sales rose 16.2%.
Faster personal products growth enabled a 140bp rise in contribution resulting in a sales
CY05 CY06 CY07 FY09 FY10
Net Sales (Rs m)
Soaps and Detergents 49,617 55,959 63,999 81,464 82656
Soaps and detergents (48% Personal Products 29,519 33,598 36,866 43,657 50479
Beverages 12,774 13,307 15,406 18,685 21424
of sales) growth and margins
Processed Foods 3,137 3,849 5,401 6,563 7308
have come under pressure Ice Creams 981 1,371 1,615 1,983 2310
Exports 13,478 12,789 13,490 11,772 10053
Others 2,505 1,803 2,273 651 644
EBIT (Rs m)
Soaps and Detergents 6,837 7,731 9,787 12,492 11853
Personal Products 8,452 9,431 10,204 11,832 12965
Beverages 2,424 2,205 2,300 2,547 3198
Processed Foods -161 129 152 -20 44
Ice Creams 51 187 128 111 127
Exports 491 664 469 904 586
Others -277 -674 -870 -242 (193)
EBIT Margin (%)
Soaps and Detergents 13.8 13.8 15.3 15.3 14.3
Personal Products 28.6 28.1 27.7 27.1 25.7
Personal Products EBIT
Beverages 19.0 16.6 14.9 13.6 14.9
margin declined 290bp Processed Foods -5.1 3.3 2.8 -0.3 0.6
over CY05 - FY10 Ice Creams 5.2 13.7 8.0 5.6 5.5
Exports 3.6 5.2 3.5 7.7 5.8
PERSONAL PRODUCTS CONTRIBUTION UP …ENABLES 250BP GROSS MARGIN RISE (%)
Toilet Soaps Detergents Personal Products
Beverages Foods Others 49.9
15.1 14.8 13.8 13.9 47.0 47.6 47.4
24.8 27.1 28.6 28.2 27.7 29.1
18.9 19.6 20.7 21.6 24.3 22.3
24.0 23.0 23.2 22.2 21.3 21.3
CY04 CY05 CY06 CY07 FY09 FY10 CY04 CY05 CY06 CY07 FY09 FY10
FY10 SALES MIX FY10 EBIT MIX
Processed Ice Creams Exports Soaps and Ice Creams Exports Soaps and
Foods 1% 6% Detergents 0% 2% Detergents
4% 48% Processed 41%
Personal Beverages Personal
Products 11% Products
13 July 2010 3
HUL re-launches major brands to regain lost ground
HUL went through a major re-launch exercise in FY10 as major brands like Wheel, Rin,
Lux, Liril, Lifebuoy, Breeze, Pepsodent, Clinic Plus and Fair and Lovely were re-
invigorated so as to regain lost market share in key segments. The re-launch of some
brands was backed by price corrections (Rin Advanced, Rin bar, Surf Excel Blue and
Lifebuoy), and others were led by product formulation changes (Wheel, Liril and Lux).
HUL invested heavily on advertising and promotion to support the re-launch exercise with
ASP increasing 340bp to 13.5%.
HUL RE-LAUNCHED MAJOR BRANDS IN FY10
HUL has re-launched ~80%
of HPC portfolio in FY10
The price of Rin powder was strategically lowered to drive up gradation from the
Dove shampoo and conditioners delivered strong market share growth.
HUL launched attractive value offerings in up-grader packs to bring oral care within
the reach of mass consumers.
Tea shares suffered due to a lack of strong offerings at the bottom end of the market;
HUL launched Brooke Bond Sehatmand to fill this gap.
Coffee markets decelerated due to adverse weather conditions.
HUL ups the ante on new category development in food, skin care
We are excited about HUL's recent launches, particularly in the skin care and food
categories. In skin care, the Vaseline For Men range, Sure and Dove deodorants were
launched during the year. Knorr Soupy Noodles marks the entry in the high growth easy-
to-cook snacks segment, which has been growing in high double digits. In the household
care segment, HUL launched CIF surface cleaner and in the laundry segment it launched
Comfort fabric conditioner. HUL has extended its water purifier brand to Pure IT compact
for the economy segment and Pure IT auto fill for the premium segment. But most of
these categories are small and HUL will have to drive category expansion in these segments
so that they contribute meaningfully to sales and profits over time.
13 July 2010 4
KNORR SOUPY NOODLES: PROMISING LAUNCH VASELINE FOR MEN: HUL'S ENTRY IN THE PREMIUM MALE GROOMING SEGMENT
Lower inventories, payables cut working capital, RoCE falls on capex
HUL is running twin tracks HUL's efforts to streamline its supply chain have resulted in a cut in the "decision-to-
in select detergent plants execution cycle" time and in working capital requirements.
Go to market has been rolled out in 32 Indian cities and has been well received by
customers (stockists). The model aims at zero inventories at the authorized dealer
level. This would reduce stocks in the system for freshness of products and enable
HUL to react quickly to changing market dynamics.
Net working capital (as a percentage of sales) fell from -13% to -17% led by a Rs10b
increase in payables and a Rs4b decline in inventory (mainly raw material inventory).
HUL has empowered each salesman with hand-held devices to ensure easy stock
taking, improved on-shelf availability and product assortment at the store level.
HUL has started running twin-tracks on a single production line in some facilities,
which has enabled it to produce two different detergents at the same time, doubling
production and improving operating efficiencies.
Most of the facilities have developed the capability of quick change over to meet
demand, which would improve product availability.
HUL's Rs7b capex program (including a new corporate office) augmented capacities
by 5-20% in major categories like detergents and personal products but resulted in a
fall in RoCE by 6.8%.
HUL's other income had derivative and forex losses of Rs563m against a gain of
Rs612m a year earlier.
Royalty payments increased Royalty payments increased by 15bp due to increased royalty and a technical fee
by 15bp in FY10 agreement with Unilever from 1 Jan 2010.
HUL transferred Lakme beauty saloons to Lakme Lever to consolidate business focus
in beauty services.
NET WORKING CAPITAL IMPROVES YOY FCF UP ~50% YOY TO ~RS30B
CY04 CY05 CY06 CY07 FY09 FY10 29.9
-5.6 18.8 19.1 20.3
-13 -12 -14 -13
Net Working Capital (Rs b) % of sales CY04 CY05 CY06 CY07 FY09 FY10
13 July 2010 5
CAPEX OF RS7B IN FY10….. …RESTRICTS ROCE EXPANSION (RS B)
2.1 2.1 56.5
CY04 CY05 CY06 CY07 FY09 FY10 CY04 CY05 CY06 CY07 FY09 FY10
HUL to expand rural reach; Shakti extended to Maharashtra, Orissa
HUL has extended Shakti As smaller players expand their reach, HUL aims to take its distribution network to the
network to Maharashtra next level to maintain a relative advantage. The rural network is being expanded three-
and Orissa fold to improve the quality of coverage (formerly covered by indirect accounts). HUL
covers 100,000 villages in 15 states through 45,000 Shakti Ammas. HUL has extended the
network to Maharashtra and Orissa. HUL has also started Shakti Vani to increase
awareness about health and awareness in rural areas.
Volumes pick up in 2HFY10; profits might stay under pressure
The impact of aggressive market intervention and re-launches is visible as volume growth
rebounded sharply in 2HFY10. We believe volume growth will remain healthy in the near
term as tactical pricing, trade promotion and product re-launches play out. This has arrested
a declining trend in market share of a few products but significant share gains in soaps,
detergents and toothpaste are not visible.
1HFY10 VOLUMES IMPACTED BY PRICE INCREASE
12 10.4 11.0
2.3 2.0 1.0
MARKET SHARE LOSS IS STABILIZING
VALUE MARKET SHARE (%) MAR-09 JUN-09 SEP-09 DEC-09 MAR-10 CH (BP) 12M CH (BP) 6M
Detergents 37.0 36.2 35.0 36.5 35.5 (150.0) 50.0
Soaps 48.2 46.3 44.5 44.6 44.5 (370.0) 0.0
Shampoo 44.9 45.4 45.2 44.8 45.2 30.0 0.0
Toothpaste 28.0 28.0 27.1 26.1 25.5 (250.0) (160.0)
Tea 23.4 21.8 22.3 21.1 20.5 (290.0) (180.0)
Source: Company/Media Reports
13 July 2010 6
We believe volume growth has been largely at the cost of margins as HUL invested
heavily on advertising and trade promotion. ASP (as a percentage to sales) increased
340bp to 13.5% in FY10 and is likely to remain high due to high decibel advertising and
media inflation. We are cautious about the sustenance of FY12 volume growth as HUL
halts some of the high decibel advertising and trade push. Besides, we see margins being
under pressure due to rising input costs (and the lack of pricing power); media inflation,
increase in royalty (50bp) and freight cost (after the increase in fuel cost).
PFAD HAS INCHED UP… LAB RANGE BOUND (TRENDING CRUDE)
Palm Fatty Acid LAB Prices
750 646.5 119
ROYALTY TO ADD TO MARGIN PRESSURE ASP SPEND UNLIKELY TO RECEDE MUCH
Royalty (% of Sales) 1.15 1.20 A&P (% of Sales) 13.6 13.5 13.4
10.5 10.4 10.5
0.55 0.58 0.55 0.57
CY 04 CY 05 CY 06 CY 07 FY09 FY 10 FY 11E FY 12E CY 04 CY 05 CY 06 CY 07 FY09 FY 10 FY 11E FY 12E
Valuation and view: near term volumes at cost of margins; Neutral
We tweak our earnings model marginally to factor in changes in the volume-price mix and
input cost pressure. We estimate a gross margin decline of 150bp (170bp earlier), EBITDA
margin decline of 120bp (180bp earlier) in FY11 and an expansion of 70bp in FY12. We
estimate EPS of Rs9.6 for FY11 and Rs11.3 for FY12, below the consensus average of
Rs10.6 and Rs11.9. The stock trades at 27x FY11E and 23x FY12E EPS, which is
expensive. Maintain Neutral.
KEY FINANCIALS (RS M)
FY09 FY10 FY11E FY12E
Net Revenue 167,836 177,253 196,663 220,363
Growth (%) -14.0 11.0 12.1
Gross Margin 80,131 88,474 95,248 107,648
Margin (%) 47.7 49.9 48.4 48.9
EBITDA 25,551 27,500 28,079 33,092
Margin (%) 14.8 15.5 14.3 15.0
PAT 21,431 20,587 21,038 24,648
Growth (%) -16.0 2.2 17.2
13 July 2010 7
Financials and Valuations
13 July 2010 8
N O T E S
13 July 2010 9
For more copies or other information, contact
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Disclosure of Interest Statement Hindustan Unilever
1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No
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13 July 2010 10