Hindustan Unilever Ltd (HUL) by dfu19616

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									Hindustan Unilever Ltd (HUL)                                                                               CMP: Rs. 255.6

   Q1FY11 Result Update                                                                                                                                   August 05, 2010
Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods company, with leadership in Home & Personal Care Products. It is the market leader across diverse
FMCG categories and has powerful brands like Rin, Surf Excel, Lux, Lifebuoy, and Ponds in its portfolio.

We present an update on the stock after the Q1FY11 results:

Q1FY11 Results Review

Y-o-Y

    HUL’s Q1FY11 results were subdued on a Y-o-Y basis. The net sales grew by 7.1% (Y-o-Y) to Rs. 47.94 bn [Q1FY10: Rs. 44.76 bn]. Though the company reported robust
    volume growth of 10.3%, price reductions undertaken in key categories like soaps & detergents restricted the sales growth to single digits.
    Domestic FMCG sales increased by 6.8% Y-o-Y, while HPC & Foods categories reported decent growth of 5.6% & 12.3% (Y-o-Y) respectively. Growth in HPC was mainly led
    by Personal Products segment, which rose 11.4% (Y-o-Y) on the back of strong double digit volume growth. Soaps & Detergents however disappointed, as the segment grew
    marginally by 2.4% impacted by aggressive price cuts undertaken in an attempt to gain market share. However, the segment performance was better than in Q4FY10 &
    Q3FY10 wherein its revenues had de-grown by 1.9% & 2.4% Y-o-Y respectively. The segment contributed 46.6% to total revenues & 62.4% to the HPC business in Q1FY11.
    Growth in foods business was driven by strong performance across the processed foods & ice creams segments. Exports revenue rose marginally by 2.8% Y-o-Y. The
    beverages segment growth was moderate.
    Despite the marginal increase in the raw materials consumed (up 0.3% Y-o-Y) & employee cost (up 0.1% Y-o-Y), the operating profit de-grew by 13%, while the OPM declined
    by 288 bps Y-o-Y to 12.5% on the back of lower product realisations, increase in A&P spends (up 33.9% Y-o-Y) & higher other expenditure (up 12.4% Y-o-Y). Even the
    purchase of Finished Goods increased by 24.7% Y-o-Y. The total expenditure as % to net sales increased from 84.6% in Q1FY10 to 87.5% in Q1FY11.
    The HPC business PBIT declined by 9.8%, while its PBIT margins declined by 276 bps to 16.2% mainly on the back of lower margins reported by soaps & detergents segment.
    Foods segment PBIT grew by 12.9%, while the PBIT margins rose marginally by 6 bps to 11.2%. While the processed foods segment witnessed a turnaround in profits, the
    Foods business margins were suppressed on the back of margin decline reported by beverage & ice cream segment.
    Depreciation cost rose 25.9% Y-o-Y, however, the same was offset by higher other income (up 105.7% Y-o-Y) & decline in interest & tax cost (down 98.5% & 5.8% Y-o-Y
    respectively). Adj. PAT de-grew by 4.1% to Rs. 5.15 bn vs. Rs. 5.37 bn in Q1FY10. Higher exceptional / extra ord. items (up 183.3% Y-o-Y) further restricted the decline in
    Reported PAT, which de-grew marginally by 1.8% Y-o-Y to Rs. 5.33 bn. The EPS (Adj.) for Q1FY11 stood at Rs. 2.4 vs. Rs. 2.5 in Q1FY10.

Q-o-Q

    Sequentially the results were decent. The net sales grew by 11.1%, driven by good performance across all the segments, mainly HPC. HPC business grew by 12.3% Q-o-Q, led
    by good growth reported by both soaps & detergents as well as personal products segment. Foods segment reported growth of 3.7%, led by strong growth reported by Ice
    Cream segment & decent growth reported by processed foods segment. However, the business growth was suppressed due to decline in the beverages revenues. Exports
    grew by 3.6%, while others category reported strong growth of 74.7%.
    Operating Profit grew by 12.7%, while the OPM improved by 19 bps. Segment-wise, HPC & Foods business both reported decent PBIT growth of 11.7% & 11.9% respectively.
    HPC profits were driven by Personal Products segment, which grew by 23.9% Q-o-Q. However, Soaps & Detergents PBIT de-grew by 1.6%. Processed Foods & Ice Cream
    segments drove the PBIT growth of Foods business. The Ice Cream segment reported profit during Q1FY11 as compared to loss in Q4FY10, while processed foods reported
    robust sequential growth of 33.5% in PBIT.
    Adjusted PAT grew by 33.4%, supported by decline in the interest cost, tax expense, and higher other income. However, Reported PAT de-grew by 8.3% on the back of one off
    gains reported in Q4FY10, which led to substantial decline in exceptional / extra-ord items in Q1FY11.




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Quarterly Financials:
                                                                                                                                                              (Rs. in Million)
                                                                  VAR [%]
               Particulars           Jun-10 Jun-09 VAR [%] Mar-10                                                        Remarks
                                                                  (Q-o-Q)
                                                                              Sales growth Y-o-Y largely driven by volume growth of 10.3% Y-o-Y. However, price
                                                                              reductions in key categories, especially in soaps & detergents segment, which reported
Net Sales                            47938.9 44756.8      7.1 43157.5    11.1 marginal rise of 2.4% Y-o-Y in its revenues, restricted overall sales growth to single digits.
Total Expenditure                    41952.7   37876     10.8 37847.6    10.8
(Inc) / Dec. in Stock in Trade        1110.7   2271.6   -51.1 -2290.5        -
Cons. of Raw / Packaging Material    16832.6 15613.1      7.8 17734.5     -5.1
Purchase of Goods                     6522.7   5231.8    24.7   6731.2    -3.1
                                                                              Ad spends continued to scale new highs as A&P / Net Sales stood at 15.7% in Q1FY11,
Advertising & Promotions              7512.1   5611.1    33.9   6265.2   19.9 thus increasing from 12.5% in Q1FY10 & 14.5% in Q4FY10.
Employees Cost                        2506.1    2504      0.1    2381      5.3
Other Expenditure                     7468.5   6644.4    12.4   7026.2     6.3
                                                                              Lower product realisation, coupled with higher A&P spends, purchase of finished goods &
Operating Profit                      5986.2   6880.8   -13.0   5309.9   12.7 other expenditure led to decline in operating profit growth & 288 bps Y-o-Y decline in OPM.
                                                                              Total other income also includes other operational income [besides the interest & dividend
                                                                              income and net gain on sale of other non-trade investments, which stood at Rs. 421.3 mn
                                                                              (In Q1FY10: Rs. 335.4 mn)]. The other operational Income, included credit of Rs. 132.2 mn
                                                                              for Q1FY11 (Q1FY10: charge of Rs. 318.1 mn) on account of forex MTM valuation of open
Other Income                          1244.5    604.9   105.7     929    34.0 forward contracts & monetary items (viz. foreign currency receivables & payables).
EBIDTA                                7230.7   7485.7    -3.4   6238.9   15.9
Interest                                 0.8     51.7   -98.5      1.4   -42.9
PBDT                                  7229.9   7434.0    -2.7   6237.5   15.9
Depreciation                            535     424.9    25.9    502.9     6.4
                                                                               Y-o-Y Decline in PBT lesser than fall in the operating profit due to substantial decline in the
PBT                                   6694.9   7009.1    -4.5   5734.6    16.7 interest cost & higher other income.
                                                                               Effective tax rate fell from 23.4% in Q1FY10 & 32.7% in Q4FY10 to 23.1% in Q1FY11.
Tax (incl. DT & FBT)                  1547.8   1642.5    -5.8   1877.6   -17.6 Sharp decline of 962 bps Q-o-Q in effective tax rate due to high extra ord. gains in Q4FY10.
PAT (pre-except & extra-ord items)    5147.1   5366.6    -4.1   3857.0    33.4 Higher other income, decline in interest & tax expense led to higher sequential PAT growth.
Extr. Ord. Items [gain /(loss)]        185.0     65.3   183.3    1955    -90.5
                                                                               Higher exceptional items, which include profit on sale of properties Rs. 184.9 mn [vs. Rs.
                                                                               51.8 mn in Q1FY10] and profit on sale of long-term trade investments Rs. 44.1 mn
                                                                               [Q1FY10: Nil] restricted the decline in reported PAT growth Y-o-Y. However, one-off gains
Reported PAT                          5332.1   5431.9    -1.8   5812.0    -8.3 in Q4FY10 from 49% stake sale in Capgemini led to sequential decline in the reported PAT.
EPS (Rs.)                                2.4      2.5    -4.2      1.8   33.4
Equity                                2182.1   2180.5     0.1   2181.7     0.0
Face Value (Rs.)                         1.0      1.0     0.0      1.0     0.0
OPM (%)                                 12.5     15.4   -18.8    12.30     1.5

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PBIT (%)                                      14.0       15.8      -11.5     13.3           5.1
PATM (%)                                      10.7       12.0      -10.5         8.9       20.1
                                                                                                                                                               (Source: Company, HDFC Sec)

Segmental Results:

Quarterly:
                                                                                                                                                                            (Rs. in Million)
                                                                   VAR [%]
             Particulars            June-10 June-09 VAR [%] Mar-10                                                                     Remarks
                                                                   (Q-o-Q)
Segment Revenue
                                                                                            Segment witnessed strong double-digit volume growth Y-o-Y due to competitive pricing actions
                                                                                            taken. Accelerated volume growth was witnessed in laundry, wherein powder & bars both grew
                                                                                            ahead of market. Wheel performed well led by a re-launch in March. Personal Wash regained
                                                                                            volume momentum, post portfolio rejuvenation & continued brand support. Even Premium
                                                                                            Soaps portfolio grew in double digits. However, the segment value growth was marginal due to
Soaps & Detergents                  22644.6 22115.3              2.4 19784.8           14.5 price reductions undertaken. Rs. 20 price point pack Dove was launched during Q1FY11.
                                                                                            Y-o-Y growth led by strong double-digit volume growth. Shampoos & Conditioners continued to
                                                                                            grow ahead of the market. In Oral Care, Pepsodent was relaunched while Close Up continued
                                                                                            to perform well. Skin Care growth was driven by re-launch of Fair & Lovely & growing
                                                                                            contribution from Pond’s White beauty & Vaseline Healthy White. The male grooming portfolio
Personal Products                   13655.1 12255.1             11.4 12552.1            8.8 continued to strengthen with launch of Vaseline Menz & Max Fairness under Fair & Lovely.
                                                                                            The segment’s Y-o-Y growth was moderate. Tea portfolio grew in double digits despite weak
                                                                                            market growth, driven by Taj, 3 Roses & Red Label. Sehatmand performance was on track.
Beverages                            5378.4     4995.8           7.7    5701.6         -5.7 Coffee growth led by volumes - across conventional & instant coffee.
Export                               2647.7     2574.7           2.8    2555.1          3.6
                                                                                            Strong revenue growth Y-o-Y led by double-digit volume growth in Kissan & Annapurna brands.
                                                                                            The recently launched Knorr soupy noodles received positive consumer response with volumes
Processed Foods                      2111.1     1721.0          22.7    1975.7          6.9 above expectations.
                                                                                            In the others category, Pure-It continued its strong growth momentum, boosted by successful
Others (includes Chemicals. Water                                                           launch of Pure-It Compact at Rs. 1000, which maintains the highest standards of germ kill
etc)                                 1125.8      794.1          41.8     644.3         74.7 efficacy. The business expanded its retail coverage & further enhanced the service levels.
                                                                                            The segment crossed Rs. 100 cr milestone during the quarter. Growth led by impulse & take
Ice Creams                           1046.4   885.9             18.1   553.0           89.2 home segments. Swirl parlours continued to expand.
Total                               48609.1 45341.9              7.2 43766.6           11.1
Less: Inter Segment Revenue             0.0   -38.5                -     0.0              -
Net sales/inc. from Operations      48609.1 45303.4              7.3 43766.6           11.1

Segment Results
                                                                                             Lower realisations, higher A&P spends, higher contribution from detergent category, which
                                                                                             offers relatively lower margins, pulled down the segment PBIT & resulted in 627 bps Y-o-Y
Soaps & Detergents                   2487.5     3814.7          -34.8   2527.3          -1.6 decline in its PBIT margin.
Personal Products                    3387.9     2698.6           25.5   2733.7          23.9
Beverages                             695.3      703.3           -1.1    789.6         -11.9

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Export                                 226.9    205.4     10.5    133.4     70.1
                                                                                 Turnaround witnessed in the segment in Q1FY11 after a loss reported in Q1FY10. Also
Processed Foods                        105.5    -12.8        -     79.0     33.5 sequentially, the segment PBIT grew at a robust rate, while the margins improved by 100 bps.
                                                                                 The segment losses declined marginally on Y-o-Y basis, but sequentially they have increased.
                                                                                 Though the water business is incurring start-up losses, we feel that it is a value-creating
Others (incl. Chemicals. Water etc)   -266.1   -279.4        -   -192.9        - proposition for investors in medium to long term.
Ice Creams                             153.2    154.8     -1.0    -15.7        -
Total                                 6790.2   7284.6     -6.8   6054.4     12.2

EBIT Margin (%)
Soaps & Detergents                      11.0     17.3 -627 bps     12.8 -179 bps
Personal Products                       24.8     22.0 279 bps      21.8 303 bps
Beverages                               12.9     14.1 -115 bps     13.8 -92 bps
Export                                   8.6      8.0   59 bps      5.2 335 bps
Processed Foods                          5.0     -0.7        -      4.0 100 bps
Others (includes Chemicals. Water
etc)                                   -23.6    -35.2        -    -29.9        -
Ice Creams                              14.6     17.5 -283 bps     -2.8        -
Total                                   14.0     16.1 -211 bps     13.8   14 bps

Capital Employed
Soaps & Detergents                -6217.8   805.0            - -2947.2         -
Personal Products                 -1092.0 -1198.4            - 1547.5          -
Beverages                          1421.5 1807.8         -21.4 2496.5      -43.1
Export                              -34.4 2241.2             - 1889.2          -
Processed Foods                     159.4 -115.8             - -153.0          -
Others (includes Chemicals. Water
etc)                               1914.9 -729.0             - -499.7          -
Ice Creams                         -874.3   402.9            -   485.7         -
Total                             -4722.7 3213.7             - 2819.0          -
Other Unallocable Items           35961.0 22935.6         56.8 23016.2      56.2
Total                             31238.3 26149.3         19.5 25835.2      20.9
                                                                                                                                                (Source: Company, HDFC Sec)
Note: i) Domestic FMGC business includes Soaps & Detergents Personal Products Beverages Processed Foods Ice Creams; ii) HPC category includes Soaps & detergents & Personal
Products; iii) Foods business includes Beverages, Processed Foods & Ice Creams




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Conclusion & Recommendation:

HUL Q1FY11 results were once again disappointing on the profit front and were in line with what we had estimated. Volume growth continued to remain strong across the categories
(HPC as well as Foods), following the competitive pricing actions undertaken by the company especially in the soaps & detergents segment. However, this corrective action has put
significant pressure on its margins. Besides this, since the last few quarters, the company has been spending heavily on Advertising & Promotional activities to improve its volume
growth and to regain its lost market share across its categories. This has dented its margins further. The A&P spends have risen consistently from 8.8% in Dec Qtr 2008 to 15.7% in
June Qtr 2010.

Over the remaining quarters of FY11, we expect the volume growth to be robust, however lower realisations are expected to restrict the overall sales growth. Pricing pressure is
likely to remain in near term, especially in the soaps and detergents segment on the back of heightened competition from other established FMCG players like GCPL & Wipro
(personal care) and P&G (in detergents). However, P&G’s recent reduction from 25% to 10% in free grammage in the promotion of Tide has provided some relief to HUL & in the
coming months, certain action in laundry pricing by HUL could take place. Operating Margins could continue to remain under pressure due to higher A&P cost and expected inflation
in raw material cost. Moreover, higher tax outgo on the back of increase in the MAT rate could put further strain on the PAT margins. We feel that the company should rationalize &
ensure more productivity out of the A&P spends. Though the current strategy of HUL to focus more on volume growth to gain back its lost market share could lead to margin
deterioration in near term, it could help the company to sustain / improve its margins over long term.

We feel that in FY11, HUL could just meet our sales & PAT projections. Hence we are keeping our estimates unchanged and would review the same post the Q2FY11 results.
Some of the key things, which we will need to monitor over the next few quarters include i) Volume Sustainability (especially in the Soaps & Detergents), ii) Price behavior of key
inputs like palm oil, raw tea, HDPE & LAB, iii) New launches, variants across the categories and iv) Pricing actions taken by the competitors. While price war may be fading in the
laundry segment, competition actions are to be closely watched in hair care & oral care segments. P&G is running a high decibel ‘mystery shampoo’ campaign in countries like India,
Indonesia, Philippines, Thailand and Vietnam, while could be targeting the premium end. This could result in further aggression in the shampoo category. Further, P&G is also
expected to launch oral care in India in Q3FY11, which could increase the competitive intensity. Some of the key positive triggers for HUL in medium term could be normal monsoon
this year & GST implementation (expected in April 2011).

At CMP of Rs. 255.6, HUL trades at 25.6xFY11E EPS. In our Q4FY10 result review dated June 01, 2010, we recommended investors to buy this scrip in the price band of Rs. 210-
220 for a price target of Rs. 240 over the next quarter. Thereafter, the stock made a high of Rs. 273.5 on July 02, 2010. The Board of Directors in their meeting held on June 11,
2010 approved buyback of Company's equity shares at a price not exceeding Rs. 280 per share and upto an aggregate amount of Rs. 6.3 bn. This could be the main reason for the
stocks outperformance during the quarter. However, the company’s recent dull financial performance over the last few quarters does not justify the same. The buy-back news seems
to have been fully factored in the current market price and scope for further upmove from hereon looks limited. Initiation of buy-back, intensity of it and the price band in which it is
carried out will impact the price performance in the near term. Until the growth prospects improve, HUL could continue to trade at a discount to its peers like Dabur, Nestle & P&G.
Once should buy this scrip only at lower levels in the price band of Rs. 220-230 (22x-23xFY11E EPS) for a price target of Rs. 250 (25xFY11E EPS) over the next quarter.

Financial Estimations: (Quick Estimates)

                                                                                                 (Rs. in Million)
                    Particulars                         FY09 (12 mn)         FY10 (Act)            FY11E
Net Sales                                                     164768.0            175238.0             192761.8
Core Operating Profit                                          22482.0             25484.0              26215.6
Adjusted PAT                                                   21431.0             20907.0              21782.1
Equity                                                           2179.9             2181.4               2181.4
EPS                                                                 9.8                 9.6                 10.0
OPM (%)                                                            13.6                14.5                 13.6
PATM (%)                                                           13.0                11.9                 11.3
                                                                           (Source: Company, HDFC Sec Estimates)




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Analyst: Mehernosh Panthaki (mehernosh.panthaki@hdfcsec.com)


RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves,
Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com
Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made
available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent
that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients,
including, but not limited to, Institutional Clients




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