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HUL: Flat margins on slow offtake
Oct 27, 2014

Hindustan Unilever Limited has announced its second quarter financial results of 2013-2014 (2QFY15). The company has reported 10.6% YoY increase in sales and 8% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Hindustan Unilever (HUL) posted a 10.8% revenue growth on a tepid 5% volume growth. For 1HFY15, topline grew by 12%.
  • Backed by lower ad-spends and controlled other expenses, operating margin improved by 0.5% in 2QFY15. The operating margin expanded by 0.8% during 1HFY15 on lower ad-spends, employee costs and other expenses (all as a proportion of sales).
  • However, at the net level, margin has contracted by 0.3% due to higher tax outgo. For 1HFY15, the net margin decreased by 0.8% partly due to higher extraordinary income earned in the previous year.
  • The company has declared an interim dividend of Rs 6 per share of face value of Re 1 each.

Standalone financial performance snapshot
Rs(m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Revenues 68,926 76,393 10.8% 137,017 153,557 12.1%
Expenditure 58,073 63,973 10.2% 115,308 127,971 11.0%
Operating profit (EBDITA) 10,853 12,420 14.4% 21,709 25,586 17.9%
EBDITA margin (%) 15.7% 16.3% 0.5% 15.8% 16.7% 0.8%
Other income 1,510 1,978 31.0% 3,277 3,999 22.0%
Interest 63 63 0.8% 125 126 0.6%
Depreciation 639 764 19.5% 1,304 1,431 9.8%
Profit before tax 11,661 13,571 16.4% 23,558 28,028 19.0%
Extraordinary inc/(exp) 334 487 45.6% 1,397 883 -36.8%
Tax 2,857 4,176 46.2% 5,624 8,461 50.4%
Profit after tax/(loss) 9,138 9,882 8.1% 19,331 20,450 5.8%
Net profit margin (%) 13.3% 12.9% -0.3% 14.1% 13.3% -0.8%
No. of shares (m)         2162.7  
Diluted earnings per share (Rs)*         18.4  
Price to earnings ratio (x)*         39.2  
*trailing twelve months

What has driven growth in 2QFY15?
  • HUL posted a 10.8% growth in topline led by 10.4% growth in Home & Personal Care and 9.4% growth in Food businesses. The underlying volume growth remained tepid at 5%. All product segments, barring beverages, reported double-digit growth during the quarter. The skin cleansing segment reported price-led growth driven by LifeBuoy, Lux and Dove. The home care segment registered double-digit growth driven by premium products. Even skin care and hair care segments delivered strong volume-led growth during the quarter. However, oral care witnessed subdued growth due to high competition in Pepsodent as well as excise benefits coming off. Packaged Foods continued to drive growth through market development. In the water business, growth was led by robust performance of premium innovations such as Pureit Ultima equipped with both RO and UV features.

    All round picture
    Sept 14 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 49.3% 11.1% 7.9% 13.6% (40)
    Personal Products 28.2% 9.9% 17.4% 24.4% 156
    Beverages 11.8% 7.6% 9.9% 17.3%   36
    Packaged Foods 5.2% 13.4%   5.0% 207
    Others(includes Exports, Chemicals, Water etc) 4.0% 18.7%   3.8% 252

  • The company was able to expand operating margin by 0.5% during the quarter. Commodity inflation remained high and softened only towards the end of the quarter. The price of PFAD for 2QFY15 was higher by 10% on a YoY basis. Therefore raw material cost to sales ratio was up by 1.5%. Even phasing out of excise benefits in some manufacturing plants hit operating margin by 0.3%. But these cost impacts were fully absorbed by a 1.7% savings in ad-spends to sales ratio coupled with a 0.3% cut in other expenses in proportion to sales. Among product segments, only the largest segment soaps and detergents saw 0.4% erosion in EBIT margin. The beverages segment reported a marginal rise in EBIT margin for the quarter.

  • At the net level, the profit margin contracted by 0.3% due to a 46% jump in tax outgo on account of phasing out of fiscal benefits in some manufacturing plants. The effective corporate tax rate for the company was up by 5.2% during the quarter.
What to expect?
HUL continues to report subdued growth in topline due to sluggish offtake that has been growing in single-digits. This coupled with high raw material costs, phasing out of excise and fiscal benefits has adversely impacted profitability. However, going ahead benefits of softening crude prices are likely to trickle in. But competition is expected to keep ad-spends high. This along with increasing royalty payments is likely to keep HUL's profit margins under pressure. The company is witnessing faster growth from rural India backed by smaller price point packs. To utilize the market potential of the underpenetrated and rapidly growing Hindi speaking belt, the company has opened a fifth branch in Central India. The company is also reorganizing its product portfolio and will be culling 25-30% of the non-performing stock keeping units across product categories by the end of 2014.

We had given a SELL on this stock. At the current price of Rs 721, the stock is trading at a multiple of 32 times its estimated FY17 earnings. At current valuations, the stock is overvalued and we maintain a SELL on the stock.

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