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HUL: Margins intact despite slow offtake
Jan 22, 2013

Hindustan Unilever Limited has announced its third quarter financial results of 2012-2013 (3QFY13). The company has reported 10% YoY increase in sales and 15.6% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • On the back of a 14.8% rise in domestic consumer business, HUL reported a 12% rise in overall revenues. For 9mFY13, the topline was up by 12.8% driven by double-digit growth in most of the business segments.
  • Aided by rationalisation in operational costs particularly raw material expenses as well as other expenditure, both as a proportion of sales, the company has been able to maintain its operating margin. During 9mFY13, the operating margin improved by 80 basis points.
  • Backed by a 67% jump in other income earned coupled with lower extraordinary expense incurred in the quarter, earnings grew by a faster 15.6%. Net profit for 9mFY13 surged by 45.4% on account of profits from sale of property.

Standalone financial performance snapshot
Rs(m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Revenues 59,555 66,548 11.7% 171,545 193,444 12.8%
Expenditure 49,850 55,660 11.7% 146,031 163,124 11.7%
Operating profit (EBDITA) 9,705 10,888 12.2% 25,514 30,320 18.8%
EBDITA margin (%) 16.3% 16.4%   14.9% 15.7%  
Other income 801 1,337 67.0% 2,118 5,011 136.6%
Interest 5 75 1573.3% 10 191 1795.0%
Depreciation 568 593 4.3% 1,701 1,746 2.6%
Profit before tax 9,933 11,557 16.3% 25,921 33,393 28.8%
Extraordinary inc/(exp) (124) (73)   908 5,990  
Tax 2,271 2,771 22.0% 6,130 9,288 51.5%
Profit after tax/(loss) 7,538 8,714 15.6% 20,699 30,095 45.4%
Net profit margin (%) 12.7% 13.1%   12.1% 15.6%  
No. of shares (m)         2162  
Diluted earnings per share (Rs)*         16.8  
Price to earnings ratio (x)*         27.4  
*trailing twelve months

What has driven growth in 3QFY13?
  • Riding on a 15% growth in the domestic consumer business, HUL's topline grew by 12%. Both Home & Personal Care and Food businesses recorded robust growth of 15% and 13%, respectively. But the underlying volume growth further moderated to 5% from 7% in the previous quarter. The company has attributed the weakness in offtake to slowdown in the Modern Trade channel and sluggish growth in Fair & Lovely and Wheel offtake. Segment wise, soaps & detergents clocked the highest growth of 20% with both Rin and Surf clocking double-digit volume growth. Even the beverage segment delivered a strong 18% growth driven by double-digit growth across all price points in tea and robust growth momentum in the premium offerings of Bru coffee. Growth in personal care segment was softer at around 13% due to pricing transitions in Fair & Lovely sachets as well as high base effect for Dove sachets. Packaged Foods was the slowest mover and was impacted by actions to manage pipeline for re-launch of Knorr Soupy Noodles.

    All round picture
    Dec12 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/
    (decline) (basis points)
    Soaps and Detergents 47.8% 19.8% 10.6% 12.4% (102)
    Personal Products 30.9% 13.0% 19.0% 28.3% 142
    Beverages 12.0% 18.2% 33.5% 17.7% 203
    Packaged Foods 4.6% 7.7%   -0.9%  
    Others(includes Exports, Chemicals, Water etc) 7.7% -43.1%   -3.7%  

  • Despite a slower offtake, HUL has been able to hold on its operating profitability aided by controlled raw material and other expenses. As a proportion of sales, raw material and other expenditure have fallen by 34 bps and 104 bps, respectively. This has offset investments in brands and higher wages, each of which grew by over 15% during the quarter. Among segments, only personal products and beverages have improved EBIT margins during the quarter. Higher ad spends clipped the PBIT margin of soap & detergent segment by 100 bps whereas in packaged foods losses reduced by more than half during the quarter.

  • Growth in net profits has been higher on account of a 67% jump in the other income earned during the quarter. Even the restructuring costs incurred during the quarter were partially offset by profit on sale of properties resulting in lower extraordinary expense as compared to the year-ago quarter. Tax incidence was higher at 24% compared to 23% in the previous quarter resulting in a 22% jump in tax outgo.

What to expect?
Although HUL has posted a decent financial performance in December 2012, a series of developments threaten to slow down its earnings growth momentum. One of the biggest concerns is the slowing offtake as realizations are largely contributing to the topline growth. With discretionary spending showing signs of contraction and Modern Trade witnessing slowdown, HUL's increased focus on premium personal product portfolio is expected to exert pressure on sales in the near term.

Moreover, even in case of its mass detergent product Wheel, the company is facing increased competition from local players. Therefore, the company's brand investments are expected to remain high in future. Even the royalty payments are set to increase as the new arrangement with parent Unilever becomes effective from 1st February 2013. According to the agreement, royalty will increase by 0.5% for FY14 and thereafter in the range of 0.3%-0.7% per annum until FY18. Apart from that even the tax incidence is set to increase as tax holiday in most plants nears completion. All these factors put together are expected to keep margins under pressure and decelerate earnings momentum.

We had given a SELL on this stock. At the current price of Rs 460, the stock is trading at a multiple of 30 times its estimated FY15 earnings. At current valuations, the stock continues to remain overpriced and we maintain a SELL on the stock.

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