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HUL: FY15 ends on a slow note - Views on News from Equitymaster

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HUL: FY15 ends on a slow note
May 9, 2015

Hindustan Unilever Limited has announced its third quarter financial results of 2014-2015(4QFY15). The company has reported 9% YoY increase in sales and 14% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Hindustan Unilever (HUL) registered an 8% YoY revenue growth in 4QFY15 on a 6% YoY underlying volume growth in the domestic consumer business. For FY15, topline grew by 10% on a 5% growth in domestic offtake.
  • The operating margin expanded by 2% YoY in 4QFY15 on the back of savings in raw material costs and other expenses (both as a proportion of sales). For FY15, the operating margin expanded by 0.9% backed by controlled raw material costs and other expenses.
  • However net margin, net of exceptional income including profit on sale of properties and wholly owned subsidiary Brook Bond Estates, has contracted by 0.4% YoY to 11% due to higher tax outgo and lower other income earned. For FY15, the net margin adjusted for exceptional income has reduced by 1.1% to 11.9%.
  • The company has declared a final dividend of Rs 9 per share of face value of Re 1 each. Along with the interim dividend of Rs 6 per share, the total dividend for FY15 works out to Rs 15 per share and at current price level the dividend yield stands at 1.7%.

Standalone financial performance snapshot
Rs(m) 4QFY14 4QFY15 Change FY14 FY15 Change
Revenues 70,941 76,756 8.2% 280,191 308,056 9.9%
Expenditure 60,166 63,575 5.7% 235,439 255,974 8.7%
Operating profit (EBDITA) 10,776 13,182 22.3% 44,753 52,082 16.4%
EBDITA margin (%) 15.2% 17.2% 2.0% 16.0% 16.9% 0.9%
Other income 1,506 984 -34.7% 6,210 6,184 -0.4%
Interest 53 - -100.0% 360 168 -53.3%
Depreciation 658 705 7.2% 2,606 2,867 10.0%
Profit before tax 11,571 13,461 16.3% 47,997 55,231 15.1%
Extraordinary inc/(exp) 660 1,794 171.7% 2,287 6,643 190.5%
Tax 3,510 5,074 44.6% 11,609 18,722 61.3%
Profit after tax/(loss) 8,721 10,181 16.7% 38,675 43,153 11.6%
Net profit margin (%) 12.3% 13.3% 1.0% 13.8% 14.0% 0.2%
No. of shares (m)         2163.5  
Diluted earnings per share (Rs)*         19.9  
Price to earnings ratio (x)*         44.9  
*trailing twelve months

What has driven performance in 4QFY15?
  • HUL saw an improvement in the offtake of its domestic business from 3% in the preceding quarter to 6% in the current quarter. The overall revenues were up by 8% for the quarter. Barring soaps and detergents, all the segments posted double-digit growth. This core segment was hit by price cuts taken earlier to pass on the input costs savings. The personal care segment recorded growth of 13.4% YoY driven by double-digit growth in skin care, hair care, oral care as well as colour cosmetics. The beverages segment posted a 12% growth on the back of double-digit growth in tea. Even packaged foods registered double-digit growth across all key brands of Kissan and Knorr. Even ice cream sales were strong led by the Magnum in the premium category. In the water business, Pureit continued its strong growth led by the premium segment Ultima.

    All round picture
    Mar 15 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 47.9% 5.0% 15.8% 13.3% 123
    Personal Products 29.3% 13.4% 26.0% 27.8% 276
    Beverages 12.7% 12.3% 11.4% 18.6% (16)
    Packaged Foods 5.5% 13.6%   6.1% 124
    Others(includes Exports, Chemicals, Water etc) 3.9% -0.4%   -2.6%  

  • Backed by benign input costs, the company's input costs to sales ratio was down by 2.7% during the quarter. Even the proportion of other expenses to sales was lower by 0.5% during the quarter. Therefore despite investing a part of the savings of 1.5% behind brands, the company's operating margin expanded by 2% YoY during the quarter. All the product segments, except beverages, have posted incremental margins during the quarter. Personal care products witnessed the highest expansion of 2.8% in EBIT margin during the quarter.

  • At the net level, the profit margin contracted by 0.4% after excluding the extraordinary income of Rs 1.7 bn earned largely from the sales of surplus properties and wholly owned subsidiary Brooke Bond Real Estates. The sharp fall in the profitability is due to jump in tax incidence to 33% from 28.7% in the year-ago quarter as a result of the phasing out of the excise benefits. Even the other income earned was lower by 35% YoY during the quarter.
What to expect?

HUL's sales in FY15 were hit by slowdown in discretionary spending that saw its volumes grow by a mere 5% during the year. Due to commodity meltdown, the company has been facing stiff competition from smaller players such as Rohit Surfactants' Ghari detergent. 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 recover fully, the company's stock price has rallied quite a lot.

At the current price of Rs 895, the stock is trading at a multiple of 45 times its trailing twelve months earnings. We had given a SELL on this stock. At current valuations, the stock is overvalued and we maintain a SELL on the stock.

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