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HUL: FY14 ends on a tepid note
Apr 28, 2014 | Updated on Apr 29, 2014

Hindustan Unilever Limited has announced its fourth quarter financial results of 2013-2014 (3QFY14). The company has reported 9% YoY increase in sales and 7% YoY increase in net profits. Here is our analysis of the results

Performance summary
  • Hindustan Unilever (HUL) reported a 10% topline growth in 4QFY14 on the back of 9% growth in each of the Home & Personal Care (HPC) and Food businesses. During FY14, revenues have grown by 8.6% aided by 8.5% rise in HPC segment and 11.6% increase in Food segment.
  • The operating margin has improved slightly aided by lower input costs and ad-spends as a proportion to sales. For FY14, controlled raw material costs resulted in a 0.5% expansion in the operating margin.
  • Net profit margin, excluding the impact of extraordinary income, was down marginally in 4QFY14 as 42% jump in other income was offset by higher tax outgo. For FY14, net profit margin without exceptional income was up by 0.6%.
  • The company has declared a final dividend of Rs 7.5 per share of face value of Re 1 each. For the full year FY14, the total dividend works out to be Rs 13 per share translating into a dividend yield of 2.2%.

Standalone financial performance snapshot
Rs(m) 4QFY13 4QFY14 Change FY13 FY14 Change
Revenues 64,658 70,941 9.7% 258,102 280,191 8.6%
Expenditure 54,940 60,166 9.5% 218,065 235,439 8.0%
Operating profit (EBDITA) 9,718 10,776 10.9% 40,038 44,753 11.8%
EBDITA margin (%) 15.0% 15.2% 0.2% 15.5% 16.0% 0.5%
Other income 1,058 1,506 42.3% 6,069 6,210 2.3%
Interest 60 53 -11.3% 252 360 43.3%
Depreciation 614 658 7.1% 2,360 2,606 10.4%
Profit before tax 10,102 11,571 14.5% 43,495 47,997 10.4%
Extraordinary inc/(exp) 94 660   6,084 2,287 -62.4%
Tax 2,324 3,510 51.0% 11,612 11,609 0.0%
Profit after tax/(loss) 7,872 8,721 10.8% 37,967 38,675 1.9%
Net profit margin (%) 12.2% 12.3% 0.1% 14.7% 13.8% -0.9%
No. of shares (m)         2162.7  
Diluted earnings per share (Rs)*         16.4  
Price to earnings ratio (x)*         34.3  
*trailing twelve months

What has driven growth in 4QFY14?
  • HUL clocked 10% growth in revenues with underlying volume growth of mere 3%. Excluding the impact of the transport strike related up-stocking in the year-ago quarter, the volume growth improves slightly to 4% during the quarter. Among product segments, only packaged foods delivered double digit growth in 4QFY14 backed by strong performance in Kissan, Knorr, Kwality Walls and Magnum brands. The premium ice cream brand, Magnum, was rolled out in four more cities. Its core product segment, soaps & detergents, grew by 9% with double-digit growth in skin cleansing and strong growth in the premium home care segment. The second largest segment, personal products grew by 8% during the quarter led by double-digit growth in hair care and good growth in skin care. However oral care was adversely impacted by high promotional intensity. The beverages segment posted an 8% growth in 4QFY14 led by double-digit volume led growth in tea. In the water business, HUL continued to strengthen its leadership position through premium innovations. The company launched Pureit Ultima (RO+UV) during the quarter.

    Mar 14 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 49.5% 9.6% 10.1% 12.1% 6
    Personal Products 28.1% 8.3% 5.1% 25.0% (76)
    Beverages 12.3% 7.5% 19.7% 18.8% 191
    Packaged Foods 5.3% 12.7%   6.2% 284
    Others(includes Exports, Chemicals, Water etc) 3.5% 18.2%   -10.0% (390)

  • The company has managed to keep operating margin in-tact through judicious pricing and cost savings. Even though the price of inputs such as palm fatty acid distillate (PFAD) and crude was higher than year-ago levels, the company's raw material cost to sales ratio was down by 0.5%. Brand investments were maintained at competitive levels with high ad-spends offset by lower promotional activities. Therefore the advertisement & promotional expenditure in relation to sales was down by 0.9% during the quarter. These cost savings were neutralized by steep double-digit rise in each of the employee costs and other expenditure. High conversion charges and freight costs as well as increased mould costs on product launches led to a sharp 15% jump in other expenses during the quarter. Among product only packaged foods and beverages posted incremental EBIT margins whereas the soaps and detergent segment has sustained EBIT margin for the quarter.

  • Excluding the impact of exceptional items, the net profit increased by 7% due to higher tax outgo that offset a 42% jump in other income earned during the quarter. The tax incidence shot up to 29% in 4QFY14 from 22.8% in 4QFY13. Interest charges were down by 11% for the quarter.

What to expect?
HUL's sales performance has been hit by slow offtake that have grown in single-digits across product categories. Only beverages and packaged foods have managed to clock a double-digit rise in sales largely led by better realizations. Therefore the company has posted a 9% topline growth on a muted 4% volume growth. The company has been aggressively launching new products out of which a number of them particularly in personal care have been received well. But the brand investments have risen. Going ahead we expect the ad-spends to remain high and coupled with increased royalty outgo as well as high tax rate; the margins are expected to remain under pressure.

We had given a SELL on this stock. At the current price of Rs 563, the stock is trading at a multiple of 31 times its estimated FY16 earnings. At current valuations, the stock does not provide adequate margin of safety and we maintain a SELL on the stock.

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