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HUL: Sales improve & margins sustained

Oct 29, 2013

Hindustan Unilever Limited has announced its second quarter financial results of 2013-2014 (2QFY14). The company has reported 9.6% YoY increase in sales and 9.3% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 9.2% on a 10% growth in the domestic consumer business with 5% underlying volume growth. For 1HFY14, topline grew by 8%.
  • The company has been able to improve operating margin slightly on the back of lower input costs and other expenses (both as a proportion of sales). During 1HFY14, the operating margin expanded by 0.5% aided by lower raw material costs.
  • Net profit increased by 13.2% due to an extraordinary income of Rs 334 m earned during the quarter. For 1HFY14, the net profit fell by 9.6% due higher exceptional income earned in the year-ago period.
  • The company has declared an interim dividend of Rs 5.5 per equity share of face value of Re 1 each, translating into a dividend yield of 1%.

Standalone financial performance snapshot
Rs(m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Revenues 63,108 68,926 9.2% 126,896 137,017 8.0%
Expenditure 53,341 58,073 8.9% 107,464 115,308 7.3%
Operating profit (EBDITA) 9,767 10,853 11.1% 19,432 21,709 11.7%
EBDITA margin (%) 15.5% 15.7%   15.3% 15.8%  
Other income 1,488 1,510 1.5% 3,674 3,277 -10.8%
Interest 63 63 -0.8% 116 125 7.7%
Depreciation 577 639 10.8% 1,153 1,304 13.0%
Profit before tax 10,615 11,661 9.9% 21,836 23,558 7.9%
Extraordinary inc/(exp) 16 334   6,063 1,397 -77.0%
Tax 2,561 2,857 11.6% 6,518 5,624 -13.7%
Profit after tax/(loss) 8,053 8,804 9.3% 15,318 17,934 17.1%
Net profit margin (%) 12.8% 12.8%   12.1% 13.1%  
No. of shares (m)         2162.5  
Diluted earnings per share (Rs)*         16.6  
Price to earnings ratio (x)*         35.8  
*trailing twelve months

What has driven growth in 2QFY14?
  • HUL posted a revenue growth of 9.2%. Its domestic consumer business grew by 10% on an underlying volume growth of 5%. Sales from the Home & Personal Care business grew by a tepid 9% due to a mere 6.4% growth in the largest segment, soaps & detergent as a result of price reductions effected in soaps earlier. However, personal care product segment registered a strong 12% growth with robust performance across the board. HUL's food business clocked double-digit growth of 14.6%. This growth was led by 16% growth in beverages mainly strong price-led growth in teas and 9% rise in sales of packaged foods contributed by Kissan ketchup.

    All round picture
    Sep 13 quarter % contribution
    to sales
    Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline)
    (basis points)
    Soaps and Detergents 49.2% 6.4% 4.5% 14.0% (26)
    Personal Products 28.4% 11.8% 5.3% 22.8% (141)
    Beverages 12.2% 16.1% 37.5% 17.0% 264
    Packaged Foods 5.3% 8.7%   3.6% 341
    Others(includes Exports, Chemicals, Water etc) 4.2% 5.7%   1.6% 93

  • Backed by controlled rise in raw material costs and other expenses, HUL managed to offset higher ad-spends and improve operating margin. As a proportion of sales, raw material costs and other expenses fell by 1.5% and 0.6% respectively that offset 1.7% increase in ad spend-to-sales ratio during the quarter. The company's operating margin improved by 0.2% to 15.7%. Only beverages and personal care product segments expanded operating margins by over 2.5% each. While operating margin of the soaps & detergent segment remained depressed, the personal care segment saw its margins contract by 1.4% during the quarter.

  • Excluding the impact of exceptional income, the net profit increased by 9.3% during the quarter on an 11% increase in operating profit. Each of the depreciation and tax outgo grew by 11%-12% whereas other income earned grew by a modest 1.5% for the quarter.

What to expect?

In the second quarter of FY14, HUL has witnessed an improvement in its domestic consumer business with growth accelerating to 10% in 2QFY14 after growing by a subdued 7% in the preceding three quarters. The improvement has come on the back of better growth from its personal care business and strong price-led growth in the beverage segment. The company has managed to offset steep rise in ad-spends aided by easing input costs. However, going ahead profitability may come under pressure with raw materials prices no longer remaining benign on weak rupee and volatile crude price as well as high ad-spends. Moreover, the volume growth continues to remain in low single-digits thereby adversely impacting earnings momentum.

We had given a SELL on this stock. At the current price of Rs 595, the stock is trading at a multiple of 28 times its estimated FY16 earnings. At current valuations, the stock remains overpriced and we maintain a SELL on the stock.

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