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HUL: Profitable growth continues
Nov 3, 2011

Hindustan Unilever Limited has announced its second quarter financial results of 2011-2012 (2QFY12). The company has reported 18% YoY increase in sales and 21.7% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Revenues of HUL grew by 17.8% YoY during 2QFY12 on the back of volume & value growth. The growth was broad based with all segments reporting double-digit growth. For the H1FY12, sales increased by 16.4% YOY aided by over 15% growth recorded by home & personal care and packaged food segments.
  • Operating (EBITDA) margin was up by 110 basis points YOY to 14.7%. Cuts in advertisement spends and other expenses, as a percentage of sales, more than made up for the higher raw material to sales ratio during the quarter. The company maintained its operating profitability at 14% in H1FY12.
  • Net profit during the quarter rose by a relatively slower 21.7% YOY on account of a 42% jump in tax outgo. PAT for H1FY12 was up by 19.7% YOY.

Financial Performance Snapshot
Rs(m) 2QFY11 2QFY12 Change H1FY11 H1FY12 Change
Revenues 47,647 56,105 17.8% 96408.8 111898.4 16.1%
Expenditure 41,178 47,838 16.2% 83130.5 96,088.9 15.6%
Operating profit (EBDITA) 6,469 8,267 27.8% 13,278 15,810 19.1%
EBDITA margin (%) 13.6% 14.7%   13.8% 14.1%  
Other income 768 777 1.1% 1,190 1282.7 7.8%
Interest 1 5 671.4% 1.5 5.6 273.3%
Depreciation 554 571 3.1% 1,089 1133 4.1%
Profit before tax 6,683 8,467 26.7% 13,378 15,954 19.3%
Extraordinary inc/(exp) 404 444 9.8% 589 1031.7 75.0%
Tax 1,426 2,022 41.8% 2973.7 3824.5 28.6%
Profit after tax/(loss) 5,661 6,889 21.7% 10,993 13,161 19.7%
Net profit margin (%) 11.9% 12.3%   11.4% 11.8%  
No. of shares (m)         2161  
Diluted earnings per share (Rs)*         11.62  
Price to earnings ratio (x)*         33.6  
*trailing twelve months

What has driven growth in 2QFY12?
  • HUL's sales continued to grow robustly driven by mix of both volume and price. Growth in all its product categories, barring hair care products, was ahead of the market. The domestic consumer business grew at 18.5% YoY underpinned by a volume growth of 9.8% YoY. Revenues from soaps and detergent segment grew by 21.8% with higher contribution coming from price-hikes even as volume growth moderated. Double-digit growth was recorded by Rin, Surf and Wheel in laundry and Lux & Lifebuoy in soap segments. Personal Care business grew by 18.2% YoY led by double-digit growth of Vaseline, Ponds and Fair & Lovely brands. Not to be left behind, hair care and oral care products delivered double-digit growth. Strong performance by tea and coffee translated into 14.6% YoY growth in beverage business. Even packaged food revenues shot up by 20.9% YoY riding on robust performance by Kissan, Knorr & Kwality brands. Export turnover, which contributes only 5.2% to overall sales, grew by 10% YoY during the quarter. Revenues from other business which includes the water-filter business fell by 24% YoY. The company launched Pureit Marvella (employing reverse osmosis technology) thereby extending its offerings at every price-point.

    All round picture
    Sep 11 quarter % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin gain/(decline)
    (basis points)
    Soaps and Detergents 46.3% 21.8% 28.4% 12.4%   65
    Personal Products 28.8% 18.2% 25.5% 24.4% 143
    Beverages 11.7% 14.6% 0.2% 13.4% (193)
    Packaged Foods 5.9% 20.9% 6.2% 5.0% (69)
    Exports 5.2% 9.9% 27.0% 8.3% 111
    Others 2.1% -24.0%   -6.7%  

  • Despite a steep 25%- 45% inflation in key commodities, HUL has been able to improve operating profitability through judicious pricing and cost control measures. Due to higher cost of palm oil, crude and coffee, the cost of goods sold increased by 26% YOY resulting in a 350 basis points jump in its proportion to sales. However, the company managed to keep operating expenditure under control during the quarter. Even advertisement outgo was maintained on a tight leash limiting its growth to a mere 0.8% during the quarter. While on one hand, advertisement spends on personal products, beverages and packaged foods were increased in the backdrop of heightened competition, the brand promotion on soap & detergents was reduced in line with the industry trend. As a result, the proportion of advertisement cost and other expense in sales fell by at least 200 basis points each during the quarter. The EBIDTA margin expanded by 110 basis points. On a segmental basis, the operating profitability of its main-stay soaps and detergents business marginally improved by 65 basis points whereas personal products registered a 496 basis points jump in its PBIT margin on a YoY basis. The operating profitability of both beverages and packaged foods contracted during the quarter. Aided by growing revenues from Pureit, the operating loss for other business fell by more than half to Rs 78 m.

  • On a YoY basis, net profit of HUL grew by a relatively slower 21.7% compared to a 27.8% rise in operating income on account of a sharp 41.8% jump in tax outgo. The tax incidence increased to 23.9% from 21.3% in the year-ago quarter. Extraordinary income was up by 9.8% during the quarter. Excluding the impact of extraordinary income, net profit grew by 23.6% during the quarter.

What to expect?
At the current price of Rs 390 the stock is trading at a multiple of 28 times our estimated FY14 earnings. HUL has been able to grow faster than the overall market in most product categories since 2010. What is commendable is growth has come despite price-hikes undertaken to counter inflation. This speaks volumes about the strong brand equity enjoyed by the company. HUL has also maintained or improved profitability in the past two quarters through cost control measures. Going forward, the company's presence at every price point is likely to insulate it from any slowdown in demand. Also its increased focus on the more profitable personal care products bodes well for its future earnings. HUL by virtue of its robust brand portfolio and huge distribution network holds good future potential. But as most of the near-term upsides have been factored in current valuations, we would advise investors to exercise caution.

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