24 JUL 2019 Quarterly Update

HINDUSTAN UNILEVER LTD

FMCG HOLD
Target Price : Rs 1,830

Q1FY20: strong margin beat amidst moderating volume growth

CMP : Rs 1,693
HUVR delivered a modest operational beat in Q1FY20 (5% UVG, 13% EBITDA
Potential Upside : 8%
growth) with a strong EBITDA Margin expansion of 244bps. This more than modest
Relative to Sector : Positive
Op. Margin beat was led by tight cost control, leverage in A&SP due to lower
competitive intensity and RM tailwinds. This performance was a tad below our
estimates (6% UVG, 8% revenue growth) as weaker performance from personal wash
MARKET DATA
segment lowered overall growth. HUVR reported all time high margin performance
No. of Shares : 216.5 Cr
(is unsustainable in our view despite RM tailwinds).
FV (Rs) :1
Market Cap (Rs Cr.) : 3,74,250
While, management is hopeful of recovery in H2FY20, it sounded cautious on near
52-week High / Low : Rs 1,870 / Rs 1,477
term demand outlook. However, HUVR is well positioned over medium term to
Avg. Daily vol. (6mth) : 850,559.3 shares
grow ahead of industry backed by agility and leveraging data analytics moat besides,
Bloomberg Code : HUVR IB
1) focus on premiumization, 2) strengthening the core, 3) distribution expansion, 4)
Reuters Code : HLL.NS
market development and 5) cost saving initiatives. Besides, GSK Consumer’s merger
BSE Code : 500696
by end of CY2019 could elevate growth rates further. We revise our TP to Rs. 1,830
NSE Code : HINDUNILVR
(48x FY21E EPS) to factor in near term revenue slowdown.

Key Highlights
 Q1FY20 – Modest operational beat amidst slowdown concerns: HUL’s Q1FY20 performance was a marginal miss on revenue
front with a 7% YoY underlying domestic FMCG Revenue growth (8% YoY growth estimates) led by 5% UVG and 2% price/mix
led growth. EBITDA growth came in at 17.6% YoY on reported basis (13% on adjusted basis) drove 244bps reported jump in
EBITDA Margin at 26.2% (237bps ahead of our estimates). Operational beat despite flattish GMs came on the back of tight cost
control (lower Other Expenses down 154bps YoY, efficiency in A&SP buying driven by lower competitive intensity in detergents
leading to 67bps YoY decline). Recurring PAT growth of 15% YoY came in 2% ahead of our estimates. We note GMs at current
levels could be sustained going forward on the back of RM tailwinds. However, volatility in crude and currency could continue
to be key watch outs in the near term as called out by the management.

 Amongst the three divisions, Home Care and Foods & Refreshments delivered between 9-10% revenue growth and higher EBIT
growth of 15-17% (led by margin improvement). Beauty & Personal Care however reported yet another quarter of disappointing
performance with topline growing at 4% dragged by weakness in popular segment (Lux & Lifebuoy – took 4-6% price cuts owing
to slowdown in category and to pass on benign RM cost scenario). However, segment registered healthy 13% EBIT growth led by
mix improvement, Gross Margins (lower PFAD prices), market development and media buying efficiency driven by lower
competitive intensity (detergents).

FINANCIAL SUMMARY (Consolidated)

Y/E Sales EBITDA PAT EPS Change P/E RoE RoCE EV/EBITDA DPS
March (Rs Cr) (Rs Cr) (Rs Cr) (Rs) (YoY %) (x) (%) (%) (x) (Rs)
FY18 36,238 7,499 5,214 24.1 16.5 55.4 78.1 79.9 37.6 20.0
FY19A 39,310 8,880 6,054 27.9 16.1 61.0 85.0 85.3 40.9 22.0
FY20E 42,357 10,037 7,027 32.4 16.0 52.1 79.3 95.0 35.9 26.1
FY21E 48,623 11,834 8,348 37.9 16.6 44.7 67.0 88.4 30.5 30.6
Source: Company, Axis Securities, Consensus Estimates CMP as on 23rd Jul 2019.
PRICE PERFORMANCE
Suvarna Joshi 120
suvarna.joshi@axissecurities.in 110
100
90
80
Jul-18 Oct-18 Jan-19 Apr-19 Jul-19
Sensex HUL

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 24 JUL 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Segment Performance:

 Home Care (34% of total revenues) delivered volume led growth of 10.1% YoY sustaining its double-digit
growth momentum led by healthy performance in both fabric wash driven by premiumization (focus on
core) and market development initiatives. Household care (driven by innovations and re-launches)
delivered healthy performance. The segment reported strong EBIT Margin expansion of 129bps YoY at
20.2% (driving healthy 18% YoY EBIT growth). Management highlighted superior margin delivery was
led by lower competitive intensity and consequent drop in media spends. Reviewing segments,
o Fabric Wash growth led by focus on core (premiumization) and market development. Sunlight
Liquid was launched in select geographies to aid market development. Rin was re-launched
nationally. Besides, management highlighted that it will soon be launching a new brand in the
detergent space.
o Household Care performance was aided by portfolio growth led by Central and South markets.
Variants and re-launches continue to build momentum.
o Purifiers: HUVR’s new Go-to-Market strategy is now in place and focus is on premium range
(Pureit Copper water purifiers) for driving growth in this segment.

 Beauty & Personal Care (45% of total revenues) delivered 4.1% YoY growth which was lower than
expectations. Growth was impacted due to muted performance delivery particularly in the popular
segment of personal wash (Lux & Lifebuoy). This segment has been a drag for several quarters now and
we believe this has been due to intense competitive activity particularly from Godrej which is giving extra
grammage for promotion and also Wipro’s Consumer business segment (Santoor). Segment EBIT growth
of 13% YoY was aided by 227bps margin expansion at 29.6% on a YoY basis driven by lower input costs
(PFAD down 15-20% YoY) in personal wash segment. Within segments,
o Personal Wash – steady growth was observed in premium portfolio; however, weak performance
of popular segment in personal wash dragged overall performance. Premiumization continues in
the personal wash space as HUVR launched FAL soap in select geographies and Lux Botanicals and
Pears Natural was launched nationally to ensure momentum in Naturals portfolio continues to
deliver on ahead of overall segmental growth. Besides, HUVR also took 4-6% price cuts in popular
segment (Lux & Lifebuoy) to drive growth in addition to improving the brands’ proposition.
o Skin Care – reported broad based growth across brands and portfolio. FAL Ayurveda facewash
and facial kits were launched marking its entry into the facial kits category, Pond’s Men range was
re-launched in Q1FY20
o Hair Care – good growth delivery across brands. Sunsilk variant was launched nationally with
natural ingredients like coconut and aloe vera.
o Colour Cosmetics – yet another quarter of consistent delivery and double digit growth with focus
on emerging trends that drove performance for the quarter under review. Slew of shade

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 24 JUL 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

expansions led to increased traffic both on online and offline channel. Elle 18 Lasting Glow compact
was launched nationally.
o Oral Care - Close Up and Ayush continue to build on momentum. However, Pepsodent remains a
drag.
o Deodorants – continues to drive market development..

 Foods & Refreshments (19% of total revenues) portfolio registered 9.2% YoY revenue growth led by
steady growth in Foods and double digit growth in ice-cream and frozen desserts. Segment EBIT growth
was strong at 16% and a 100bps margin expansion at 19.4%. Within segments,
o Beverages witnessed a fairly reasonable quarter driven by consistent strategy across brands and
market. HUVR on e-commerce platform launched Lipton Japanese Matcha Green Tea during the
quarter on the back of leveraging new trends in consumer tastes and preferences.
o Ice-cream/Frozen Desserts reported robust double digit growth given a seasonally strong quarter
backed by innovations.
o Foods the core segment continued to perform well and registered 9% YoY growth. Management
will focus on market development to drive penetration and thus growth.

Other key highlights:

 On Demand Outlook: Management highlighted that (1) demand has slowed down due to agrarian stress
and lower rural wages, besides liquidity crunch across wholesale and GT channel, extended winter and
impact of ongoing General Elections, (2) rural demand growth slowed down and grew at par with urban
(grew at 1.1x / 1.3x that of urban in Q4FY19/Q3FY19). On competitive intensity, management highlighted
that it has significantly reduced across categories. However, in the Modern Trade channel intensity is
higher in some pockets and categories coming in from Private Labels and other organized players.
Demand slowdown has been noted in Personal Wash category across the industry and in the company’s
portfolio as well.
 On Rural versus Urban growth: Growth rates for Rural have slowed down and are now growing at par
with Urban markets. Rural contributed to 30-35% of total revenues for HUVR. Further, demand in
Northern India is trending well which are key markets for the company.
 On Margin Outlook: Margin expansion from here on will be challenging considering slowdown in
category growth rates and robust margin expansion in the last couple of years. HUVR is however
committed to reporting modest margin expansion and will look to newer cost saving items. Reported all
time high margin expansion in the past several quarters. HUVR reported a strong 244bps (150bps
comparable) expansion in EBITDA Margin at 26.2% (23.7% / 23.3% in Q1FY19 / Q4FY19 respectively).
 On RM price trends: Management highlighted that going forward commodities and currency will
continue to be volatile in the near term. However, currently it remains benign.

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HINDUSTAN UNILEVER
FMCG

 On price cuts in soaps: HUVR has taken pricing intervention between 4-6% across the soaps portfolio on
the back of benign RM environment and consumption slowdown to sustain volume growth.
 On Strategy: HUVR’s strategy for growth will continue to be that of consistent, competitive, profitable
and responsible growth and the company is well positioned with strategy remaining unchanged across
categories by driving penetration, premiumization, market development and also leveraging data
analytics to develop it as a key moat going forward.
 On Channel Revenue contribution: Modern Trade contributed to ~15-17% of total revenues and e-
commerce channel share stands between 2-3% of total revenue pie the balance coming in from General
Trade channel.
 Growth across Channels: While across the market slowdown is reported within channels, Modern Trade
is growing faster than General Trade. However, management is hopeful that with various policy
interventions and measures from the Government and Monetary policy (interest rate cuts of 75bps over
last 6 months) there could be some percolation getting to the ground and thus demand uptick could be
possible in H2FY20. Although quantum of growth will need to be monitored and will come along over a
period of time. Regards Canteen Stores Department (CSD) the channel has witnessed erratic off-takes in
terms of volume. Receivables continue to slightly under pressure from this channel.
 Outlook: We were positive surprised by the EBITDA Margin beat reported by HUVR (all time highest
margins reported) we believe the same is unsustainable and could witness some moderation going into
the quarters ahead. However we remain believers in the management pedigree and the strategic focus of
the company to deliver on consistent, competitive volume led growth. Further, with structural
premiumization trend, strengthening core of the core across categories, improving distribution through
put by leveraging data analytics and foraying under penetrated fast growing categories would enable
HUVR to sustain volume growth in the medium to long term horizon. Moreover, with GSK’s integration
to complete by CY19 will only aid incremental volume and profitability growth driving higher than
competition earnings growth over medium term. GSK merger will also aid in HUVR becoming one of the
largest foods company in India and leading to robust growth. While over the medium to long term HUVR
offers considerable earnings growth visibility we remain believers in the company as a pickup in H2FY20
could spur demand growth led by various interventions taken by the Government on policy front.
However, noting the guarded management commentary on demand outlook and revenue growth in the
near term, we revise our TP to Rs. 1,830 (earlier Rs. 1,875) with “HOLD” rating on the stock valuing it at
48x FY21E EPS.

 Key Risks to our call are 1) rural demand not picking up; 2) raw material inflation 3) re-emergence of
competition from local/ regional brands and P&G; 4) delay in integration of GSK Consumer merger and
challenges thereof.

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 24 JUL 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

UVG (%) growth moderates owing to slowing market Op. Leverage & Cost saving initiatives drive reported
and high base EBITDA Margin beat (%)

14 12 30 26
12 11 11
10 10
10 25 22 20 23 24 22 21 23
7 7 19 19 20 20 20
8 6 6
5 20 17 18 18 18
6 4 4 4 4
4 15

%
%

2 0 10
0
-2 5
-4 -1
0
-6 -4

Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q1FY17
Q1FY16
Q2FY16
Q3FY16
Q4FY16

Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: Company, Axis Securities

Moderation in Domestic FMCG growth momentum Innovation pipeline remained healthy despite lower A&SP
dragged by weak popular segment in personal wash (%) spends (%)

17
18 16 16 14 12 13 12 12 12 12
16 11 12 12 11 11 11 11 11 11
13 13 12 10 11
14
12 10
10
10 9 8
8
8 7
6 6
%

6 5 5
3 4 4 4
4 2
2 2
0
0 0
Q3FY17

Q1FY20
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17

Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q4FY18
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18

Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20

Source: Company, Axis Securities

P/E Band 12 month Forward P/E (x)

70
2500
60
50 2000
40 1500
30
20 1000
10 500
0
0
Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Nov-18
Mar-19
Jul-13

Mar-14
Jul-14

Mar-15
Jul-15

Mar-16
Jul-16

Mar-17
Jul-17

Mar-18
Jul-18

Jul-19

Nov-13

Mar-15
Mar-14

Nov-14

Nov-15
Mar-16

Nov-16
Mar-17

Nov-17
Mar-18

Nov-18
Mar-19
Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

PE Mean Mean+1Stdev Mean-1Stdev

Price 15x 30x 45x 60x

Source: Company, Axis Securities

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 24 JUL 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Results Update (Standalone)

Quarterly Performance

(Rs.Cr.) Q1FY20 Q1FY19 % Change (YoY) Q4FY19 % Change (QoQ)

Volume Growth (%) 5.0 12.0 -700bps 7.0 -200bps

Net Sales 9,984.0 9,356.0 6.7 9,809.0 1.8
Other Op. Inc 130.0 131.0 136.0
Total Revenue 10,114.0 9,487.0 6.6 9,945.0 1.7

Expenditure
Net Raw Material 4,648.0 4,364.0 6.5 4,743.0 -2.0
Employee expenses 452.0 442.0 2.3 402.0 12.4
Other Exp 1,206.0 1,277.0 -5.6 1,372.0 -12.1
A&SP 1,161.0 1,153.0 0.7 1,107.0 4.9
Total Expenditure 7,467.0 7,236.0 3.2 7,624.0 -2.1

EBIDTA 2,647.0 2,251.0 17.6 2,321.0 14.0

EBITDA Margin (%) 26.2% 23.7% +244bps 23.3% +283bps
Oth. Inc. 147.0 135.0 8.9 118.0 24.6
Interest 24.0 7.0 242.9 7.0 242.9
Depreciation 214.0 127.0 68.5 134.0 59.7
Exceptional Item 7.0 -59 -71.0
PBT 2,563.0 2,193.0 16.9 2,227.0 15.1
Tax 808.0 664.0 21.7 689.0
PAT 1,755.0 1,529.0 14.8 1,538.0 14.1
Share of profit of Associates - - -
Adjusted PAT 1,755.0 1,529.0 14.8 1,538.0 14.1
EPS (Rs.) 8.1 7.1 7.1

Ratios (% of Net Sales)

Gross Margin (%) 54.0 54.0 +4bps 52.3 +173bps

EBITDA Margin (%) 26.2 23.7 +244bps 21.4 +283bps

Material Costs 46.0 46.0 -4bps 47.7 -174bps

Employee Cost 4.5 4.7 -19bps 4.0 +43bps

A&SP 11.5 12.2 -67bps 11.1 +35bps

Other Expenses 11.9 13.5 -154bps 13.8 -187bps

Income Tax Rate (%) 31.5 30.3 +125bps 30.9 +59bps

Source: Company, Axis Securities

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 24 JUL 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Results Update (Standalone) (Cont’d)

% Change % Change
Segmental Performance Q1FY20 Q1FY19 Q4FY19
(YoY) (QoQ)
Revenue Contribution

Home Care 3,465.0 3,146.0 10.1 3,502.0 -1.1

Beauty & Personal Care 4,589.0 4,407.0 4.1 4,393.0 4.5

Food & Refreshments 1,950.0 1,785.0 9.2 1,916.0 1.8

Others (incl Exports, Water and Infant etc) 110.0 149.0 -26.2 134.0 -68.7

Total Segment Revenues 10,114.0 9,487.0 6.6 9,945.0 -0.5

EBIT

Home Care 699.0 594.0 17.7 619.0 12.9

Beauty & Personal Care 1,358.0 1,204.0 12.8 1,220.0 11.3

Food & Refreshments 379.0 328.0 15.5 346.0 9.5

Others (incl Exports, Water and Infant etc) 2.0 -2.0 -200 2.0 -

Total Segment EBIT 2,438.0 2,124.0 14.8 2,187.0 11.5

EBIT Margin (%)

Home Care 20.2 18.9 +129bps 17.7 +250bps

Beauty & Personal Care 29.6 27.3 +227bps 27.8 +182bps

Food & Refreshments 19.4 18.4 +106bps 18.1 +138bps

Others (incl Exports, Water and Infant etc) 1.8 -1.3 +316bps 1.5 +33bps

Total 24.1 22.4 +172bps 22.0 +211bps

Source: Company, Axis Securities

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HINDUSTAN UNILEVER
FMCG

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
Regulations).

1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as
defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of
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 24 JUL 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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09