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  • Stock Recommendation | HINDUSTAN UNILEVER LTD – SELL – Target Price : 1500

    Publish date: OCTOBER 15, 2018

    HUL has delivered another strong quarterly performance, with double digit sales YoY growth across all three divisions of home, personal care and food. Overall domestic volume growth was in line with estimates at 10% for Q2FY19 versus 12% sequentially and 4% YoY. Net sales grew 11.1% YoY to Rs 92.3 bn indicating a YoY price increase of meagre 1.1% because of intense competition. However, the company is growing ahead of the industry on the back of WIMI strategy, as also innovations and activations. The company also continues to make margin gains through cost management and favorable product mix. However we believe, sustaining the current level of super normal growth in the longer run would be a huge task for HUL which is trading at super rich valuation of 43.9x FY20 earnings. Post correction of 15% in the last 45days, we continue to recommend SELL on HUL with a decreased TP of Rs 1500 at 42 x FY20 earnings (from Rs 1610 at 45x).

    Underlying Volume Growth was reported at 10% with sales of Rs 92.3 bn(+11.1% YoY and -2.7% QoQ). Management indicated that the companyexperienced double digit volume growth across all three divisions of homecare, personal care and food driven by rural demand, increasing consumerspending, and a return of normalcy to trade channels. Rural market wasgrowing faster than the urban one for HUL, with small towns and villagescontributing about 40% to overall sales.

    Gross margins contracted 200 bps YoY to 52% due to negative impact of crude price inflation and currency depreciation and was partly offset by benign vegetable oil and food prices. Management has guided for ‘continuous modest margin expansion driven by cost-savings’.

    Higher cost of goods sold, improvement in product mix, judicious pricing and a strong saving program, but higher advertising and promotional expenditure (to support innovation and face competition) led to EBIDTA of Rs 20.2 bn (+20% YoY and -10.3% QoQ) with margin of 21.9% (+170 bps YoY and -180 bps QoQ)

    Consequently company reported PAT of Rs 15.25 bn (EPS of Rs 7 and +19.5 % YoY) .The Company has declared an interim dividend of Rs 9 per share.


    Strong volume growth, ability to take price hikes and sustained margins have been the highlight of quarterly performances of HUL. Management also indicated that the rural growth is picking up and overall competitive intensity is easing. So we highlight no change in fundamentals of the company and hence we maintain our FY19/FY20 estimates. However we believe, sustaining the current level of super normal growth in the longer run would be a huge task for HUL which is trading at super rich valuation of 43.9x FY20 earnings.

    Also with increasing global yields, higher country and liquidity risk, we estimate the cost of equity (COE) to have increased for FMCG companies including HUL. Multiyear high target multiple HUL and increasing equity risk premium compel us to lower the target multiple accorded to HUL. Post correction of 15% in the stock price of HUL in the last 45days, we continue to recommend SELL on HUL with a decreased TP of Rs 1500 at 42 x FY20 earnings (from Rs 1610 at 45x). We note that our SELL rating is only on account of stretched valuations.


    Home care segment slightly disappointed in the quarter due to input cost inflation and weak performance of the water- purifier sub segment. The management indicated that fabric wash and household care which includes brands such as Domex, Vim and Surf Excel reported double digit growth, while performance of the water purifier segment was weak due to weakness in Gravity purifiers; there is a fundamental shift towards RO and electronic devices. The management indicated that it is reviewing its purifier portfolio strategy and remains committed to the category. Overall, home care segment delivered revenue of Rs 30.8 bn (+12.4% and -2.1% QoQ) with EBIT margin of 37.6% (+200 bps YoY and -310 bps QoQ). We note that Home care portfolio EBIT margin dropped 310 bps QoQ to 16%. Management termed the 16% margin level as a fairly healthy level. The company has taken price hikes of 2/3% in this segment in Q2FY19, impact of which would reflect in future quarters.

    In the beauty and personal care segment (includes personal wash, skin, hair, oral, deos, and color cosmetics) management indicated that Skin care registered strong double digit growth on the back of Fair & Lovely and Pond's performance while Hair Care witnessed another double digit growth quarter, led by the premium portfolio and continued robust performance of Indulekha. However, oral care business has not been doing well for HUL due to heightened competitive intensity from Colgate, Dabur and Patanjali. Consequently this segment reported revenue of Rs 43.16 bn (+10.4% YoY) with EBIT margin of 25.8% (-60 bps QoQ and +160 bps YoY). We believe this segment has the room and potential for improvement in performance and contribute more to the value of the company.

    Foods and refreshments ((tea, coffee, ice cream, and frozen dessert) - F&R segment revenue was reported at Rs 17.04 bn (+13% YoY) with EBIT margin of 20.8%. Beverages segment reported broad-based double-digit growth. Food registered double-digit growth led by Kissan ketchup and jam. The management highlighted that WIMI strategy is helping the company in F&R business.


    Management indicated that rural sales grew ahead of urban in Q2FY19. Monsoon started well but ended with below-normal season in parts of the country.

    HUL management indicated its margin performance was driven by cost saving initiatives and the impact of crude price inflation and currency depreciation and was partly offset by benign vegetable oil and food prices.

    HUL has lost its market share in the oral care segment due to the popularity of Patanjali's Dant Kanti brand.

    HUL will continue to implement cost-saving measures to improve operating margin. The company is now using data analytics to identify patterns and spot opportunities where cost-saving measures can be used.

    From a portfolio perspective, the company witnessed strong growth in (a) fair and lovely and Pond’s in skin care, (b) Indulekha in hair, (c) Lakme in color cosmetics, (d) Dove and Pears in personal wash, (e) Kissan and Knorr in foods, and (f) the Ice-cream portfolio

    Management expects the demand to be stable in the near term. Also the management would keep a strict vigil on currency depreciation and the rise in crude oil prices.


    In terms of numbers, we factor in 17%/14% growth in revenues for FY19/FY20. While gross margins are likely to contract in the coming year, we expect that the company shall be able to save costs in other lines to expand EBITDA margin by ~140 bps over FY18-FY20E. We expect EPS growth of 19%/x23% in FY19/FY20.

    The management has indicated that while the quarter’s growth should not be read as a trend, the worst is behind in terms of demand, and that rural growth is picking up. Management mentioned that the competitive intensity has eased. The company is growing ahead of the industry and is consistently delivering higher margins. However we believe, sustaining the current level of super normal growth in the longer run would be a huge task for HUL which is trading at super rich valuation of 43.9x FY20 earnings.

    Near term fundamentals of the company remain intact and hence we maintain our estimates for HUL for FY19 and FY20. But with increasing global bond yields, higher country and liquidity risk, we estimate the cost of equity (COE) to have increased for Indian FMCG companies including HUL. Multiyear high target multiple and increasing equity risk premium compel us to lower the target multiple accorded to HUL. Post correction of 15% in the stock price of HUL in the last 45days, we continue to recommend SELL on HUL with a decreased TP of Rs 1500 at 42 x FY20 earnings (from Rs 1610 at 45x). We note that our SELL rating is only on account of stretched valuations.


    Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company with a heritage of over 80 years in India. HUL is a subsidiary of Unilever, one of the world’s leading suppliers of Food, Home Care, Personal Care and Refreshment products with sales in over 190 countries and an annual sales turnover of €53.7 billion in 2017. Unilever has over 67% shareholding in HUL.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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