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HUL: 2QCY07 and buyback analysis - Views on News from Equitymaster
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HUL: 2QCY07 and buyback analysis
Jul 30, 2007

Performance summary
  • Topline grows by 13% YoY during the quarter, with Home and Personal Care (HPC) and Foods business growing 11% YoY and 25% YoY respectively.

  • Operating margins improve by 1.3% YoY mainly due to lower ad spends as a percent of sales.

  • Bottomline up 24% YoY excluding the extraordinary items.

  • The company approves a share buyback scheme at a maximum price of Rs 230 per share. Recommends a dividend of Rs 3 per share (dividend yield of 1.4%)

HLL   Financial view        
(Rs m) 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Net sales 30,832 34,814 12.9% 58,813 66,657 13.3%
Expenditure 26,686 29,695 11.3% 51,361 57,918 12.8%
Operating profit (EBDITA) 4,146 5,120 23.5% 7,451 8,739 17.3%
EBDITA margin (%) 13.4% 14.7%   12.7% 13.1%  
Other income 814 1063 30.6% 1,508 1,971 30.8%
Interest 34 110 221.9% 55 162 195.1%
Depreciation 301 333 10.8% 639 662 3.6%
Profit before tax 4,625 5,739 24.1% 8,265 9,887 19.6%
Extraordinary item 13 212   1,502 802  
Tax 833 1020 22.6% 1,533 1,829 19.3%
Profit after tax/(loss) 3,806 4,931 29.6% 8,235 8,860 7.6%
Net profit margin (%) 12.3% 14.2%   14.0% 13.3%  
No. of shares (m) 2205.7 2207.0   2205.7 2207.0  
Diluted earnings per share (Rs)*         8.69  
Price to earnings ratio (x)*         23.9  
* On a 12-month trailing basis

What is the company’s business?
HUL is India’s largest FMCG company with a dominant presence in almost all consumer categories. The company’s turnover, at Rs 110 bn in CY05, was over one third of the total branded/organized FMCG market in India. HUL's brand equity remains unrivalled in India. In the last couple of years, the company has embarked on a major restructuring exercise focusing on improvement in quality of earnings, pruning brand portfolio and securing a viable future for its non-core businesses through JVs or spin-offs. Barring the unexpected competition witnessed in its soaps and detergents category in 2004, the initiatives taken by the company have yielded positive results.

What has driven performance in 2QCY07?
All round growth: HUL reported a topline growth of 13% YoY during the quarter, with Home and Personal Care (HPC) and Foods business growing by 11% YoY and 25% YoY respectively. The FMCG sales were higher 13% YoY with a 5.9% YoY growth in volumes. The continuing business grew by 12.9% YoY, while exports grew merely by 1.3% led by poor performance of the marine segments.

Segment revenue snapshot
(Rs m) 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Soaps and Detergents 14,559 16,687 14.6% 27,745 31,132 12.2%
Personal Products 8,467 8,978 6.0% 16,126 17,199 6.7%
Beverages 3,006 3,633 20.9% 6,182 7,338 18.7%
Processed Foods 973 1,334 37.2% 1,855 2,645 42.6%
Ice Creams 505 622 23.1% 770 944 22.7%
Exports 3,287 3,331 1.3% 6,042 6,850 13.4%
Others (includes Chemicals, Agri, Plantations etc) 379 639 68.4% 719 1,270 76.5%
Total Segment Revenue 31,175 35,223 13% 59,438 67,378 13%
Less : Inter segment revenue 19 14 -27% 34 28 -18%
Net Segment Revenue 31,156 35,209 13% 59,404 67,351 13%

Foods segment: The 25% YoY growth in the foods segment was led by strong double-digit performance in the beverages, ice creams and processed food category. Products both in the tea and the coffee segment witnessed strong growth. The processed food was the key performer with 37% YoY growth in the quarter. All key brands like Annapurna, Knorr and Kissan contributed to growth. However, salt was under performer. In this quarter, Knorr Chinese mix products were launched. In the ice cream segment, the ‘Moo’ range of the ice creams was completely launched thereby witnessing a 23% YoY growth. HUL continues to invest in products and variants in this segment, which we believe will result in this category continuing its double-digit growth on a small base. The management is very bullish on the foods business. Over the next fiscal, the company is planning new launches in this segment.

HPC segment: Despite broad based growth performance of the home and personal care (HPC segment), that of personal care was sub par with just 6% YoY growth. All the key segments in Personal Care namely shampoos, toothpaste except skin care products grew during the quarter. Soaps and Detergents posted double-digit value growth of 15% YoY. The market share of detergents improved to 37.8% in this quarter over 35.3% in 2QCY06. In the toilet soap category, while Hamam and Dove brands did well, Lifebuoy sales remained flat. In the hair wash category, the company gained marginal market share over 1QCY07. It lunched the Dove hair care products in the quarter. In the toothpaste category, while Close up did well, Peposdent remained flat. The company however witnessed lower growth in its skin care portfolio. This was mainly due to planned reduction of stocks in the distribution pipeline in preparation for Fair and Lovely relaunch in July 2007. However, the higher end products in Ponds and Lakme brands are doing well. The company expects to do well in this category going forward on account of its new launches and re launches. The management has identified the growth areas and hopes to maintain the market shares across categories going forward. The sales in line with our CY07 estimates.

Water business: HUL has extended its water purifier Purefit to 6 states namely Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Maharashtra and West Bengal. It further expects to double the capacity. Currently it reaches 2 m households. The management is positive on this segment.

Cost break-up
As a % of net sales 2QCY06 2QCY07 1HCY06 1HCY07
Total Cost of goods 53.3% 53.4% 53.9% 54.4%
Staff Cost 5.7% 5.8% 5.6% 5.7%
Advertisement 11.2% 9.7% 11.0% 10.4%
Other Expenditure 16.3% 16.5% 16.8% 16.4%

Improved margins: During the quarter, the company’s margins improved by 1.3% YoY. This was mainly due to lower ad spends as a percent of sales, which fell from 11.2% in 2QCY06 to 9.7% in this quarter. The lower ad spends reflects the planned phasing done by the company, though the competitive ad spends continue. Going forward the ad spends is likely to be higher on account on new products. Except for foods and others the PBIT for all segments witnessed strong growth. Stabilising of the operating facility in company’s Baddi plant was ongoing and hence the ice-cream division witnessed lower margins. Modern Foods was merged with the company and hence the slowdown was seen in the margins of the food division. The cost pressures are expected to remain on the company.

Segment Results (Profit before interest and tax)
(Rs m) 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Soaps and Detergents 2,084 2,684 28.8% 3,608 4,428 22.7%
Personal Products 2,414 2,632 9.0% 4,282 4,662 8.9%
Beverages 407 569 39.7% 1,027 1,125 9.5%
Foods (includes Oils and Fats, Culinary and Branded Staples ) 42 (19) -146.0% 45 55 20.8%
Ice Creams 109 107 -2.0% 117 120 2.1%
Exports 156 34 -78.1% 236 167 -29.3%
Others (includes Chemicals, water etc) (192) (297) 54.2% (243) (454) 86.8%
Total Segment Results 5,020 5,710 13.7% 9,072 10,102 11.4%

The extraordinary effect: As can be seen from the first table, bottomline witnessed nearly 30% YoY growth during the quarter. However, excluding the extraordinary item on account of profit from the sale of a property, the bottomline is up 24% YoY for the quarter. Higher operating margins and lower depreciation cost aided the bottomline growth. For 1HCY07, excluding the extraordinary items the net profits is up 19.7% YoY.

Average buy back price (Rs) 200 210 220 230
No of shares (m0 3.2 3 2.9 2.7
% reduction in shares 1.4 1.36 1.3 1.24
Buyback: The company has approved a share buyback scheme at a maximum price of Rs 230 per share. The company would operate the buyback scheme through open market up to a maximum amount of Rs 6.3 bn. The sum represents 25% of the total paid-up capital and free reserves as on December 31, 2006. The buyback would result in the promoter stake going up marginally, as they would not be offering their shares under the scheme. The aim for the move is to effectively utilize the surplus cash (Rs 22.6 bn as on 30th June 2007), have a leaner balance sheet and improve return ratios.

All round picture:

  % contribution to sales Revenue growth PBIT growth PBIT margin (%)
Soaps and Detergents 47.4% 14.6% 28.8% 16.1%
Personal Products 25.5% 6.0% 9.0% 29.3%
Beverages 10.3% 20.9% 39.7% 15.7%
Foods (includes Oils and Fats, Culinary and Branded Staples ) 3.8% 37.2% -146.0% -1.4%
Ice Creams 1.8% 23.1% -2.0% 17.1%
Exports 9.5% 1.3% -78.1% 1.0%
Others (includes Chemicals, Agri, Plantations etc) 1.8% 68.4% 54.2% -46.4%

What to expect?
At Rs 208, the stock is trading at 22.6 times our FY10 estimates. The company has done well to maintain its market share. However, ITC’s entry in personal care products and additional brand entry of P&G would add to the competition. This would entail higher ad spends for HUL. Dearth of innovations continues in HUL, as management is more focused towards renovation and product extension within existing categories. However, except water purifier (Pure it) the company has not launched any new products over last few years. We believe that only renovation and no emphasis on product innovation will limit HUL’s growth. The management has indicated that it intends to grow its top line aggressively in the future and has lined up new products in foods ad personal care segments. Also the buyback is positive, as it would improve the return ratios. However the cost pressure and the competitive pressures are likely to remain. The company has recommended a dividend of Rs 3 per share (dividend yield of 1.4%)

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