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HUL: Robust financial performance

Oct 29, 2012

Hindustan Unilever Limited has announced its second quarter financial results of 2012-2013 (2QFY13). The company has reported 12% YoY increase in sales and 17% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • HUL clocked a 12.5% rise in revenues during 2QFY13 led by 16% growth in its domestic consumer business that saw an underlying volume growth of 7%. For 1HFY13, topline grew by 13% aided by double-digit growth in both business segments.
  • The company has been able to expand operating margin by 80 basis points backed by controlled cost of goods sold. During 1HFY13, operating margin increased by 120 basis points.
  • Despite higher interest outgo and higher extra-ordinary income earned in the year-ago quarter, earnings increased by 17% aided by 83% jump in other income. Net profit for 1HFY13, net profits surged by 62.5% backed by higher profits from sale of property.

Standalone financial performance snapshot
Rs(m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Revenues 56,101 63,108 12.5% 111,990 126,896 13.3%
Expenditure 47,834 53,341 11.5% 96,180 107,464 11.7%
Operating profit (EBDITA) 8,267 9,767 18.2% 15,810 19,432 22.9%
EBDITA margin (%) 14.7% 15.5%   14.1% 15.3%  
Other income 811 1,488 83.4% 1,317 3,674 178.9%
Interest 5 63 1072.2% 6 116 1973.2%
Depreciation 571 577 1.0% 1,133 1,153 1.8%
Profit before tax 8,502 10,615 24.9% 15,988 21,836 36.6%
Extraordinary inc/(exp) 444 16   1,032 6,063  
Tax 2,057 2,561 24.5% 3,859 6,518 68.9%
Profit after tax/(loss) 6,889 8,069 17.1% 13,161 21,381 62.5%
Net profit margin (%) 12.3% 12.8%   11.8% 16.8%  
No. of shares (m)         2,161.9  
Diluted earnings per share (Rs)*         16.25  
Price to earnings ratio (x)*         33.4  
* On a trailing 12-months basis

What has driven performance in 2QFY13?
  • On the back of 17.6% growth in its home & personal care business and 9.2% rise in the food business, HUL's domestic consumer business grew by 16%. The growth was supported by an underlying volume growth of 7% that remained tepid on account of the budget rationalization in the Canteen Stores Department offtake. The largest product segment, soaps & detergents registered the fastest growth of 22% driven by double-digit growth in both laundry and household care. Increased focus on brand uptrading resulted in both Surf and Rin recording double-digit volume growth during the quarter. The personal care segment posted a 12% growth aided by pick-up in momentum of hair and oral care products. Beverages grew by 10% driven by growth in high end tea and coffee. In packaged foods, double-digit growth in Knorr and Kwality Walls led to a 10% expansion of the overall segment sales.

    All round picture
    Sept 12 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline) (basis points)
    Soaps and Detergents 50.5% 22.3% 41.2% 14.3% 191
    Personal Products 27.7% 12.1% 6.6% 24.2% (125)
    Beverages 11.4% 10.0% 17.5% 14.3% 91
    Packaged Foods 5.3% 10.2%   0.3% (423)
    Others(includes Exports, Chemicals, Water etc) 7.4% -38.1%   0.4% (434)

  • HUL saw its profitability improve during the quarter aided by controlled rise in cost of goods sold. This was reflected in the 182 basis points fall in the cost of goods to sales ratio for the quarter. However input costs savings were partially offset by increased brand investments and higher other expenditure. As per the company, media intensity by the FMCG sector has increased significantly during the quarter and is currently at a 15-quarter high level. Therefore even HUL has raised ad-spends by 18% during the quarter. Even other expenses and wages have grown by 15% each. Among segments, only soap & detergent and beverage segments posted incremental margins during the quarter.

  • Net profits grew by a faster 17% backed by 18.2% rise in operating income and 83% jump in other income earned during the quarter. The robust growth has come despite a 13 folds jump in interest expenses and considerably lower extraordinary income earned for the quarter.

What to expect?
HUL has reported robust topline growth and healthy increase in profitability during the quarter. However, the revenue growth has been largely price-led as offtake particularly in personal care segment was adversely impacted due to the slower offtake by the Canteen Stores Department. The rising media intensity coupled with innovative product launches by the company is expected to keep its ad-spend high in the coming quarters. Even softening price of palm oil is likely to result in increased competition by local players in the soap segment. Despite these headwinds faced in the personal care segment, the company is expected to benefit from its consistent and steady brand investments in the long run. During the quarter, the recently acquired TRESemmé hair care brand from its international portfolio was launched in India. The hair care portfolio was further strengthened with the relaunch of Clinic Plus and a new Hair Fall Rescue range under Dove.

We had given a SELL on this stock. At the current price of Rs 543, the stock is trading at a multiple of 30 times its estimated FY15 earnings. At current valuations, the stock appears overpriced and we continue to maintain a SELL on the stock.

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