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HUL: Extraordinary boost for bottomline
Oct 25, 2010

Hindustan Unilever Limited has announced its 2QFY11 results. The company has reported 11.6% YoY and 32% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales of HUL grew by 11.6% YoY during 2QFY11 on the back of strong volume growth in the domestic consumer care.
  • Operating (EBITDA) margins fall by 1.7% during the quarter to stand at 13.6%. This comes on the back of higher advertisement costs and higher cost of packaging moulds (both as a percentage of sales).
  • Bottom line increased by 32% YoY during the quarter. This is due to higher other income, lower interest costs and extraordinary gains. When adjusted for extraordinary items, the bottom line is seen to fall by 6.7% YoY.
  • HUL's bottom line grew by 13.1% while net profit margin improved by 0.3% to 11.4% in 1HFY11. This performance comes on the back of higher other income and extraordinary profits partly offset by higher other expenditure and higher effective tax rate. When adjusting for extraordinary income net profit of the company is seen to fall by 5.5% YoY.
  • HUL declared an interim dividend of Rs 3 per share.


Financial performance snapshot
Rs(m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 42,692 47,647 11.6% 87,719 96,409 9.9%
Expenditure 36,173 41,178 13.8% 74,049 83,131 12.3%
Operating profit (EBDITA) 6,520 6,469 -0.8% 13,670 13,278 -2.9%
EBDITA margin (%) 15.3% 13.6%   15.6% 13.8%  
Other income 473 768 62.5%     808              1,190 47.2%
Interest     15    1 -95.3% 67   2 -97.7%
Depreciation 462 554 19.7%     887              1,089 22.7%
Profit before tax 6,515 6,683 2.6% 13,524 13,378 -1.1%
Extraordinary inc/(exp) (1,352) 404   (1,287)     589  
Tax 878 1,426 62.4%              2,521              2,974 18.0%
Profit after tax/(loss) 4,285 5,661 32.1%              9,717 10,993 13.1%
Net profit margin (%) 10.0% 11.9%   11.1% 11.4%  
No. of shares (m) 2,181 2,182                2,181              2,182  
Diluted earnings per share (Rs)*         10.7  
Price to earnings ratio (x)*         28.7  
*trailing twelve months

What has driven growth in 2QFY11?
  • Sales growth for HUL was volume led. The volume growth of domestic consumer business stood at 14% YoY while Home and Personal Care business grew by 9% YoY. Sales from foods business grew by 13% which is ahead of market. The performance this quarter has been broad based with the company spending on brand building, defending its market position and launching several new products this quarter.
    All round picture
    June quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline)
    (basis points)
    Soaps and Detergents 44.8% 6.3% -8.3% 11.7% (186)
    Personal Products 28.7% 14.7% 0.2% 23.0% (332)
    Beverages 12.0% 9.3% -1.3% 15.4% (165)
    Processed Foods 4.6% 26.2% 4.6% 510
    Ice Creams 1.2% 9.0% 117.5% 10.0% 498
    Exports 5.6% 16.6% 10.2% 7.1% (42)
    Others 3.2% 42.7% -12.0% (281)

  • Sales of soaps and detergent business which contributes 44.8% of the total revenue was up by 6.3% YoY. This was led by double digit growth in the Rin portfolio. The company reported a strong growth in the personal products portfolio at 15% YoY. This was the result of good volume growth driven by hair, oral and skin care segments. Beverage business of the company grew by 9.3%. This was on the back of strong growth in coffee. However, some down trading was observed in tea during the quarter as a result of high food inflation. Processed foods grew by 26% while ice cream grew by 9%. Pure-it water filter continues to grow strongly as a result of increase in penetration and launch of new innovative products like Pureit Marvella at Rs 6,900.

  • Operating income fell during the quarter. While the company benefited from lower raw material costs and lower staff costs, higher spending on brand building and increase in other expenditure saw operating income dip by 0.8% YoY. Advertisement expense grew by 13.2% during the quarter, ending at 13.6% of sales while other expenditure grew by 26.5% ending at 17.7% of sales.

  • On a segmental basis, the company saw its soaps and detergents business being affected by lowering of prices of the products and heightened competitive activity. This has resulted in the sales increasing by a muted 6.3% YoY. Moreover, increase in brand building has resulted in PBIT margins shrinking by 1.9%. Margins for the personal products category improved by 0.2% during the quarter. PBIT margins for the beverage category fell as a result of higher raw tea prices. Margins for foods category turned positive for the quarter and stood at 4.6%. For ice cream business, the margins doubled to 10% as the company consolidated its new ice-cream parlours called Swirl’s. The loss at operating level for others reflecting the water filter business was higher this quarter as a result of the company investing behind Pureit aggressively.

  • Net profit of the company grew on the back of higher other income and higher extraordinary profits during the year. The extraordinary profits include profit from sale of property, provision for expenses related to buyback of shares, profit on sales of long term investment and restructuring costs.

What to expect?
At the current price of Rs 306 the stock is trading at a multiple of 21.8 times our estimated FY13 earnings (RPro subscribers please click here. The company delivered good volume growth. However, we are concerned about the increase in competitive intensity that the company is facing. Given this, we would advise investors to be CAUTIOUS on the stock.

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