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HUL: Growth across brands - Views on News from Equitymaster

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HUL: Growth across brands
Jul 28, 2008

Performance summary
  • Topline grows by 21% and 20% respectively in 2QCY08 and 1HCY08.

  • EBITDA margins decline by 1% in account of higher ad spends in both the periods.

  • Excluding the extraordinary items, the bottomline grows by 19% YoY for both the periods.

  • The board has declared a dividend of Rs 3.5 per share (dividend yield of 1.5%)



Financial view
(Rs m) 2QCY07 2QCY08 % change 1HCY07 1HCY08 % change
Net sales 34,814 42,157 21.1% 66,657 80,096 20.2%
Expenditure 29,801 36,642 23.0% 57,999 70,503 21.6%
Operating profit (EBDITA) 5,013 5,515 10.0% 8,658 9,593 10.8%
EBDITA margin (%) 14.4% 13.1%   13.0% 12.0%  
Other income 269 839 211.4% 611 1,612 163.8%
Interest (678) (721) 6.3% (1,038) (921) -11.2%
Depreciation 333 379 13.8% 662 742 12.1%
Profit before tax 5,628 6,695 19.0% 9,645 11,384 18.0%
Extraordinary item 414 180   1,100 206  
Tax 1111 1294 16.5% 1,886 2,199 16.6%
Profit after tax/(loss) 4,931 5,582 13.2% 8,859 9,391 6.0%
Net profit margin (%) 14.2% 13.2%   13.3% 11.7%  
No. of shares (m) 2207.0 2178.3   2207.0 2178.3  
Diluted earnings per share (Rs)*         9.08  
Price to earnings ratio (x)*         25.7  
* On a 12-month trailing basis

What has driven performance in 2QCY08?
  • HUL’s net sales for both the period under consideration grew by more than 20% YoY, led by 20% YoY growth in HPC and 14% YoY growth in ‘Foods’ business. The company witnessed broad based growth across all its categories, brands and channels. 8.3% YoY volume growth aided by 9.7% YoY price led growth led to the double-digit growth in the topline.

  • The detergents and personal wash segments grew by 20% YoY in 1HCY08 led by strong volume growth, better mix and price increases. The company improved its market share in the detergent segment. ‘Sunsilk’, ‘Ponds’ and ‘Dove’ brands aided the growth in their respective categories. Beverages and ice cream segments led the growth in the foods division. However, atta and salt under performed on account of supply chain issues. The company improved its market share in tea and coffee segments. On the exports front, HUL had pruned some of its loss making operations, which led to the strong growth. In the water segment, it now has a presence in 364 towns and has sold 1 m units. In processed foods, HUL is gaining scale with its ‘Knorr’ and ‘Kissan’ brands doing very well. It is currently test marketing ‘Amaze’, a brain food in 3 southern states.

  • The company’s margins declined by 1% in both the period under consideration. Higher ad spends and other expenses (as a percent of sales) led to the decline. However, till now as compared to its peers, HUL has done well on the margin front. The prices of the raw materials viz. vegetable fat (50% YoY), chemicals (25% YoY) and packaging costs did worry, however the company had taken price hikes to offset this. While the PBIT margins of all the segments witnessed a decline, ice cream segment and exports division’s margins improved by 2.7% and 6.3% respectively. In the exports division, the company has pruned some of its operations which were loss making.

  • Excluding the extraordinary items, (structuring costs and profit on sale of properties) the bottomline in 2QCY08 has grown by 19% YoY, while that of 1HCY08 has reported an 18.4% growth. Higher other income on account of sale of invested bonds also aided the growth.

    All round picture..
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin (decline)/gain
    (basis points)
    Soaps and Detergents 47.3% 20.7% 11.9% 14.7% -120
    Personal Products 25.0% 18.6% 16.0% 27.8% -60
    Beverages 9.9% 15.5% 4.3% 14.6% -160
    Foods (includes Oils and Fats, Culinary and Branded Staples ) 3.5% 12.1% - 2.5% 500
    Ice Creams 1.7% 15.5% 34.3% 19.0% 270
    Exports 9.2% 17.7% 728.2% 7.3% 630
    Others (includes Chemicals, Agri, Plantations etc) 3.5% 176.6% 20.7% -17.2% 2,220

What to expect?
At the current price of Rs 233, the stock is trading at 20.2 times our CY10 estimates. The company has done well to register growth across its offerings. It has also witness improving market shares. The management has indicated that the new offerings are also performing well and the company wants to consolidate the existing offerings before coming up with a slew of new products. While the company has done better than our estimates on the topline front, margins are still lower than our estimates. To conclude, although we are enthused with the company’s performance, valuations at the current juncture are on the higher side.

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