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HUL: Poor offtake & high taxes mar profits - Views on News from Equitymaster

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HUL: Poor offtake & high taxes mar profits
Jan 19, 2015 | Updated on Jan 22, 2015

Hindustan Unilever Limited has announced its third quarter financial results of 2014-2015 (3QFY15). The company has reported 7.6% YoY increase in sales and 18% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Hindustan Unilever (HUL) recorded a 7.6% revenue growth on a 3% underlying volume growth in the domestic consumer business. For 9mFY15, topline grew by 10.5%.
  • The company has been able to keep operating margin in-tact on the back of lower raw material costs and other expenses (both as a proportion of sales). For 9mFY15, the operating margin expanded by 0.6% YoY on lower ad-spends to sales ratio.
  • However net margin, excluding exceptional income from sale of properties, has contracted by 3.4% YoY to 11% due to higher tax outgo and depreciation charges. For 9mFY15, the net margin adjusted for exceptional income reduced by 1.4% YoY to 12.2%.

Standalone financial performance snapshot
Rs(m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Revenues 72,234 77,743 7.6% 209,250 231,300 10.5%
Expenditure 59,966 64,428 7.4% 175,273 192,399 9.8%
Operating profit (EBDITA) 12,268 13,315 8.5% 33,977 38,901 14.5%
EBDITA margin (%) 17.0% 17.1% 0.1% 16.2% 16.8% 0.6%
Other income 1,427 1,201 -15.8% 4,704 5,200 10.5%
Interest 182 42 -76.7% 307 168 -45.2%
Depreciation 644 731 13.4% 1,948 2,162 11.0%
Profit before tax 12,868 13,743 6.8% 36,426 41,770 14.7%
Extraordinary inc/(exp) 230 3,966 1626.5% 1,627 4,849 198.1%
Tax 2,475 5,187 109.6% 8,099 13,648 68.5%
Profit after tax/(loss) 10,623 12,522 17.9% 29,953 32,972 10.1%
Net profit margin (%) 14.7% 16.1% 1.4% 14.3% 14.3% -0.1%
No. of shares (m)         2163.2  
Diluted earnings per share (Rs)*         16.9  
Price to earnings ratio (x)*         56.3  
*trailing twelve months

What has driven growth in 3QFY15?
  • HUL recorded a 7.6% revenue growth on a tepid underlying volume growth of 3% in the domestic business. The core categories of soaps & detergents and personal products, each having sales share of over 30%, posted sluggish growth of 6-7%. The company has cited a host of factors for the poor performance. In soaps & detergents, HUL took a price-cut of 5% to pass on the lower price of crude and PFAD. Therefore the period during which primary sales were stopped to flush-out the higher priced inventory adversely impacted the offtake. The phase-out of the excise benefits affected the oral care and hair care categories in Personal Products. However, packaged foods saw double digit growth of 13% for the fifth quarter in a row. The robust performance was led by strong growth in Knorr, Kwality Walls and Magnum. Even beverages reported an 8% growth during the quarter. In the water business, Pureit continued to sustain double-digit growth.

    All round picture
    Dec 14 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 46.5% 6.0% 11.4% 14.0% 69
    Personal Products 31.7% 6.5% 3.3% 27.7% (87)
    Beverages 11.9% 8.2% 2.7% 15.3% (82)
    Packaged Foods 4.8% 12.6%   -5.7% (251)
    Others(includes Exports, Chemicals, Water etc) 3.6% 27.8%   -1.4% 246

  • The company has managed to keep operating margin in-tact backed by lower raw material costs and ad-spends (both as a proportion of sales). The price of PFAD fell by 22.2% to Rs 38.3 per kg from its peak value in June 2014 quarter. Similarly crude price declined by 29% to Rs 4700 per barrel from its peak value in September 2014 quarter. Resultantly raw material-to-sales ratio was down by 1.2% YoY during the quarter. Even ad-spends as a proportion of sales was lower by 0.3% YoY. These savings more than offset the steep rise in employee cost and other expenditure. The employee costs were higher during the quarter due to a one-time provision of Rs 390 m for select contested matters. Among product segments, only the largest segment soaps and detergents expanded EBIT margin by 0.7% YoY during the quarter.

  • At the net level, the profit margin contracted by 3.4% after excluding the extraordinary income of Rs 3.9 bn earned from the sales of properties. The sharp fall in the profitability is on account of jump in tax incidence to 29.3 % from 18.9% in the year-ago quarter. The phasing out of the excise benefits pushed up effective tax rate by 4.7% for the quarter. Even depreciation charges increased by 13% due to an additional charge of Rs 48 m subsequent to adoption of revised guideline for fixed assets in the Companies Act 2014.
What to expect?
HUL continues to witness sluggish growth in offtake. While rural sales growth has remained robust, the company is still witnessing flattish growth in urban India and Modern Trade. The company has been swift in cutting prices in soaps & detergents to thwart higher competition from unorganized players in a commodity meltdown. Going ahead, the company wants to invest behind premium brands and increase their penetration by raising the affordability factor. Although discretionary spending is yet to pick-up, the company’s stock price has already run up a lot on anticipation of robust sales growth and better profitability from input cost savings.

We had given a SELL on this stock. At the current price of Rs 950, the stock is trading at a multiple of 42 times its estimated FY17 earnings. At current valuations, the stock is overvalued and we maintain a SELL on the stock.

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