X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
HUL: Shutdown effect - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

HUL: Shutdown effect
Oct 31, 2007

Performance summary
  • Topline grows 9.7% YoY during the quarter, driven by 10.8% growth in domestic FMCG.
  • Operating margins remain stable mainly due to lower ad spends as a percent of sales.

  • Bottomline up 7% YoY excluding the extraordinary items for 3QCY07.

  • Recommends a dividend of Rs 3 per share to commemorate the 75th year of the company. (dividend yield of 1.5%)

Financial view
(Rs m) 3QCY06 3QCY07 % change 9mCY06 9mCY07 % change
Net sales 30,660 33,646 9.7% 89,473 100,303 12.1%
Expenditure 26,631 29,170 9.5% 77,992 87,088 11.7%
Operating profit (EBDITA) 4,029 4,476 11.1% 11,480 13,215 15.1%
EBDITA margin (%) 13.1% 13.3%   12.8% 13.2%  
Other income 968 1059 9.3% 2,476 3,030 22.4%
Interest 34 68 96.8% 89 229 157.2%
Depreciation 320 353 10.2% 959 1,015 5.8%
Profit before tax 4,643 5,114 10.2% 12,908 15,001 16.2%
Extraordinary item 1,377 (12)   2,880 790 -72.6%
Tax 812 1021 25.7% 2,345 2,850 21.5%
Profit after tax/(loss) 5,208 4,081 -21.6% 13,442 12,941 -3.7%
Net profit margin (%) 17.0% 12.1%   15.0% 12.9%  
No. of shares (m) 2,206 2,208   2,206 2,208  
Diluted earnings per share (Rs)*         8.18  
Price to earnings ratio (x)* -       25.1  
* 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 3QCY07?
On the sales front: The company reported a topline growth of 9.7% YoY for 3QCY07. The results for the quarter are not comparable to that of 3QCY06 to the extent of amalgamation of Modern Foods (India) and its subsidiary with the company. The domestic FMCG grew by 10.8% YoY, led by HPC segment growing by 9.5% YoY and foods growing by 17% YoY for the quarter. Exports declined by 4% YoY in 3QCY07.

Rs m 3QCY06 3QCY07 % change 9mCY06 9mCY07 % change
Domestic FMCG-HPC 22,314 24,440 9.5% 65,645 72,369 10.2%
Domestic FMCG-Foods 4,738 5,537 16.9% 13,503 16,401 21.5%
Total FMCG 27,052 29,976 10.8% 79,148 88,770 12.2%
Exports 3,274 3,136 -4.2% 9,316 9,986 7.2%
Others 334 534 59.9% 793 1,547 95.3%
Total 30,660 33,646 9.7% 89,256 100,304 12.4%

Domestic FMCG growth was adversely impacted by a decline in skin and toothpastes sales due to lock out at their Assam factory for 7 weeks. Soaps, fabric wash, personal wash and shampoo categories witnessed steady growth with their core brands delivering. The company re-launched Fair and Lovely, Clinic All Clear, Lux Crystal Shine and launched the Lakme 9-5 range during the quarter. 15% of Hindustan Unilever's output of personal products was produced in the Assam factory. Now with the operations started, the management expects to do well in the coming quarters.

Segment revenue snapshot
(Rs m) 3QCY06 3QCY07 % change 9mCY06 9mCY07 % change
Soaps and Detergents 13,933 15,722 12.8% 41,678 46,854 12.4%
Personal Products 8,538 8,876 4.0% 24,664 26,075 5.7%
Beverages 3,455 3,905 13.0% 9,638 11,243 16.7%
Processed Foods 973 1,289 32.5% 2,827 3,935 39.2%
Ice Creams 338 371 9.7% 1,108 1,315 18.7%
Exports 3,274 3,136 -4.2% 9,316 9,986 7.2%
Others (includes Chemicals, Agri, Plantations etc) 480 642 33.8% 1,199 1,912 59.4%
Total Segment Revenue 30,991 33,940 10% 90,429 101,319 12%
Less : Inter segment revenue 25 19 -24% 58 46 -21%
Net Segment Revenue 30,967 33,922 10% 90,371 101,273 12%

Foods business continued its strong performance and grew by 17% YoY for the quarter. The processed food segment grew by 33% YoY in 3QCY07 led by robust sales of Knorr, Kissan and ice cream segments. In beverages, tea continued with its steady growth with Red Label and Lipton performing well, while Bru Instant Coffee had an excellent quarter. Exports witnessed a decline of 4.2% YoY in the growth due to a drop in the non-FMCG exports. Pure-it water purifier has 3 m customers across 8 states and was launched in Delhi and UP during this quarter. The results are in line with our estimates. The competitive pressures have increased with ITC also entering the personal care segment.

Cost break-up
As a % of net sales 3QCY06 3QCY07 9mCY06 9mCY07
Total Cost of goods 52.9% 53.1% 53.6% 53.9%
Staff Cost 5.8% 5.7% 5.7% 5.7%
Advertisement 11.1% 10.5% 11.1% 10.4%
Other Expenditure 17.1% 17.4% 16.9% 16.7%

Stable margins: The company reported stable margin for 3QCY07 at 13%. Though raw material and other costs increased as a percentage of sales, lower labour and advertisement costs aided the margins. The EBIT margins of soaps and detergents improved by 53% YoY mainly due to recovery in detergent margins and improvement in soaps product mix. However, personal product margins were under pressure due to lower revenue growth. Beverages witnessed 18% YoY growth and the food segment (oils, staples etc) reported profit at the EBIT level. Export margins too declined by 4.2% YoY due to rupee appreciation. For 9mCY07, the margins too were at 13%, which are in line with our estimates.

Segment Results  (Profit before interest and tax)
(Rs m) 3QCY06 3QCY07 % change 9mCY06 9mCY07 % change
Soaps and Detergents 1,720 2,626 52.7% 5,029 7,054 40.3%
Personal Products 2,284 2,147 -6.0% 6,474 6,810 5.2%
Beverages 477 562 17.8% 1,349 1,687 25.1%
Foods (includes Oils and Fats, Culinary and Branded Staples ) (4) 31   29 86 195.5%
Ice Creams 43 5 -87.5% 147 125 -14.9%
Exports 205 63 -69.2% 415 230 -44.6%
Others (includes Chemicals, water etc) (155) (329) 113.0% (437) (783) 79.1%
Total Segment Results 4,570 5,106 11.7% 13,006 15,208 16.9%

Higher interest cost affect profits: The company reported a decline in net profits to the extent of 22% YoY for 3QCY07. Higher interest costs and higher tax rates led to the fall. However, excluding the extraordinary (profit from sale of land, restructuring costs and buyback expenses) it has grown by 7% YoY. For 9mCY07, the net profits are up 15% YoY excluding the extraordinary.

All round picture table
  % contribution
to sales
Revenue growth PBIT growth PBIT margin (%) PBIT margin
(decline)/gain (basis points)
Soaps and Detergents 46.3% 12.8% 52.7% 16.7% 440
Personal Products 26.2% 4.0% -6.0% 24.2% (260)
Beverages 11.5% 13.0% 17.8% 14.4% 60
Foods (includes Oils and Fats,
Culinary and Branded Staples )
3.8% 32.5% 0.0% 2.4% 280
Ice Creams 1.1% 9.7% -87.5% 1.4% (1,110)
Exports 9.2% -4.2% -69.2% 2.0% (420)
Others (includes Chemicals,
Agri, Plantations etc)
1.9% 33.8% 113.0% -51.3% (1,910)

What to expect?
At the current price of Rs 205, the stock is trading at 22.6 times our FY10 earnings estimates. Though the company has broadly sustained its market share, compared to other FMCG players HUL has underperformed in this quarter. Even with the personal product likely to witness growth momentum going forward, we believe the competitive pressures will increase with the entry of new players. Further, the input pressure would also limit its margin expansion.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

HUL SHARE PRICE


Nov 16, 2018 (Close)

TRACK HUL

COMPARE HUL WITH

MARKET STATS