17 OCT 2019 Quarterly Update

HINDUSTAN UNILEVER LTD

FMCG HOLD
Target Price : Rs 2,175

Q2FY20: Steady performance amid concerns on demand slowdown…

CMP : Rs 2,063
Despite challenging scenario, HUVR delivered a strong Q2FY20 with a beat on all
Potential Upside : 5%
counts versus our estimates. UVG was healthy at 5% (ahead of our 4% estimates) and
Relative to Sector : Positive
growth as broad based across segments. Despite sharp deceleration in rural demand
to 0.5x urban HUVR reported stable growth QoQ with EBITDA margin expansion.
MARKET DATA
Management has cautioned for challenging times on demand front in near term, but
No. of Shares : 216.5Cr
remains hopeful of a recovery in H2FY20 aided by various government and central
bank measures to spur investments and demand. Overall we like HUVR’s FV (Rs) :1
consistency in execution and its consistency in delivering ahead of industry earnings Market Cap (Rs Cr.) : 4,48,546
growth to continue. HUVR is well positive to remain ahead of competition owing to 52-week High / Low : Rs 2,100 / Rs1,500
its agility and nimbleness to adapt to changing market dynamics, 2) leverage data Avg. Daily vol. (6mth) : 865,427.8 shares
analytics thus creating entry barriers, 3) focus on premiumization, 4) strengthening Bloomberg Code : HUVRIB
the core, 5) distribution penetration, and 6) cost saving initiatives. Besides, GSK Reuters Code : HLL NS
Consumer’s merger by Q4FY20 could elevate growth rates further. As corporate tax BSE Code : 500696
rate cut will lead to savings, the earnings too will get a boost. As a result we revise NSE Code : HINDUNILVR
our TP to Rs. 2,175 (48x Sept 21 EPS).

Key Highlights
 Q2FY20 – overall god performance with beat on operational front: HUVR’s Q2FY20 performance was a beat on
revenue/EBITDA/PAT front with a 7% YoY underlying domestic FMCG Revenue growth versus our estimates of 6% YoY. The
growth was led by 5% UVG (4% our estimate) and 2% price/mix led growth (dragged partially by sharp price cuts in soaps
portfolio). EBITDA grew 16% YoY (on comparable basis, reported EBITDA growth higher at 21% YoY) to Rs 2,443cr led by 290
bps expansion in margin; however, adjusted for fiscal refund accounting change in the base quarter, the underlying EBITDA
growth stood at 14% (margin up 150 bps YoY). Margin expansion was led by 250 bps expansion in gross margin (better mix, raw
material tailwinds and savings agenda-led) partly curtailed by higher other expenses and 8% YoY jump in A&P. Recurring PAT
grew 20% YoY to Rs. 1,848cr led by corporate tax rate cuts.

 Amongst the three divisions, Home Care and Foods & Refreshments delivered yet another steady quarter with high single digit
revenue growth, while personal care delivered soft 5% growth partially dragged by price cuts taken in the personal wash
category as volume off-take did not fully compensate for the price cuts taken. Management indicated that it is taking additional
price cuts in soaps category now including Dove and Pears. The effective price cut is ~6% of which 3-4% has come in Q2FY20
while the balance shall reflect in Q3FY20. Pricing action in personal wash was taken to pass on benign RM coststo customers and
also to remain agile in a slowing volume offtake environment.
FINANCIAL SUMMARY (Consolidated)
Y/E Sales EBITDA PAT EPS Change P/E RoE RoCE EV/EBITDA DPS
March (Rs Cr) (Rs Cr) (Rs Cr) (Rs) (YoY %) (x) (%) (%) (x) (Rs)
FY18 36,238 7,499 5,214 24.0 16.5 55.3 78.1 79.8 37.6 20.0
FY19 39,310 8,880 6,054 27.9 16.1 61.0 85.0 85.3 40.9 22.0
FY20E 41,707 10,217 7,243 33.5 19.8 60.1 88.2 93.1 42.2 26.1
FY21E 48,196 12,094 8,814 39.5 18.0 50.9 77.6 82.4 35.7 30.9
Source: Company, Axis Securities, Consensus Estimates CMP as on 15th Oct 2019
PRICE PERFORMANCE
Suvarna Joshi 160
suvarna.joshi@axissecurities.in

120

80
Jul-18 Feb-19 Oct-19

BSE Sensex Hind. Unilever

01
 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Segment Performance:

 Home Care (34% of total revenues) delivered yet another quarter of strong 10% YoY growth and robust
21% YoY EBIT growth driven by 150bps expansion in EBIT margin to 17.7%. Growth was led by healthy
performance in both fabric wash and household care division. Fabric was growth was driven by
premiumization (focus on core). Household care too continued to report growth led by premiumization
(liquids upgradation) and bars penetration. Reviewing segments,
o Fabric Wash growth led by focus on core (premiumization) and new launched Love & Care a
premium detergent brand was launched in select channels and Magic Rinse powder (saves water)
was launched in TN.
o Household Carewitnessed growth momentum driven by liquids upgradation in urban areas and
bars penetration in rural areas.
o Purifiers:saw good growth in the premium segment post revamp in the portfolio and
management strategy.

 Beauty & Personal Care (46% of total revenues) delivered 5.3% YoY growth that was led by healthy
performance of personal products. However, pricing interventions in popular personal wash category
dragged growth. Among other segments, Skin care reported robust double digit growth backed by strong
performance across brands. Color Cosmetics sustained growth with focus on channels of the future and
Oral Care posted good growth aided by freshness and naturals proposition. HUVR reported robust
segment EBIT growth of 15.6% YoY was aided by 257bps margin expansion at 28.9% on a YoY basis
driven by lower input costs (PFAD/crude)in personal wash segment despite pricing interventions. Within
segments,
o Personal Wash –aided by strong RM tailwinds, HUL undertook ~6% price cuts across its personal
wash portfolio, of which 3-4% of price cuts in Lux & Lifebuoy were affected in Q2FY20 it plans to
take further price cuts in its Dove and Pears portfolio. In totality, the effective price cuts will be
~6% of which 3-4% have come in Q2FY20 and balance will come in Q3FY20. Pears Naturalle
bodywash range was launched nationally during the quarter.
o Skin Care –reported double digit growth backed by robust performance across brands. HUL
launched Pond’s Super Light range & Pond’s Micellar water range nationally and Elle 18 skin
range in select geographies.
o Hair Care – good growth delivery across brands. HUVR strengthened its brand proposition
through a national ClinicPlus #MeriBetiStrong campaign. To drive premiumization and extend
market development, HUVR launched TRESsemme in satchet format.
o Colour Cosmetics – good growth momentum continues and strategy of focusing on channels of
the future continue. Launched Absolute Matte Revolution lipstick nationally. Besides #FreeYourLips,
a purpose led campaign was launched.

02
 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

o Oral Care–portfolio growth was led by freshness and naturals proposition. HUVR launched Close
Up White Attraction variants in select geographies.
o Deodorants– HUVR continues to focus on market development amidst high competition. During
the quarter it launched Axe Mini Ticket variants across geographies.

 Foods & Refreshments (19% of total revenues) portfolio reported broad based growth across portfolio
thus registering 8.4% YoY revenue increase. Beverages delivered a good quarter while Ice-Cream and
Frozen Desserts maintained strong growth trajectory. Within foods, core segments performed
well.Segment EBIT de-grew marginally by -0.3% YoY with a 139bps correction in EBIT Margin to 15.9%
owing to phasing of some expenses in Food & Refreshments segment. Within segments,
o Beverages witnessed good growth delivery driven by leveraging purpose led brands.
o Ice-cream/Frozen Desserts sustained strong growth momentum. HUVRs strategy of good growth
by geography expansion is seen and benefits of acquisition from Aaditya Milk are also coming
through.
o Foods saw good performance across core segments; Kissan brand equity was further
strengthened.

Other key highlights:

 On Demand Outlook:Management highlighted that (1) overall market growth has decelerated sharply.
As per Nielsen, sector value growth over past 3 months is 5% vs 9% earlier while volume growth has
fallen to 3% from 7% earlier on rolling 12 months basis. (2) rural demand growth slowed downand is now
growing at 0.5x of urban (grew at 1.2x / 1.5x that of urban in Q2FY19/Q3FY19). However, both rural and
urban growth rates have slowed down. Further, management indicated that slowdown is stark in some
pockets like MP, Chattisgarh, Greater Maharashtra outside of Mumbai, Pune while some of the southern
markets like TN and UP are holding up well. (3) Competitive intensity remained stable in the market on
QoQ basis. (4) Premiumization trend is intact and even today Natruals portfolio is growing at 1.5x that of
overall HUVR portfolio. (5) Modern Trade (MT) and E-comm channels are growing much ahead of
General Trade (GT). Both MT and E-comm are growing in double digits.
 On Government initiative: HUVR is hopeful that various Government measures, RBI led policy rate
intervention and direct benefit transfers will lead to some improvement in income of rural people. Further,
adequate to above rainfall in most regions could however, potentially lead to improved earnings of rural
households going ahead.
 On RM price trends: Management highlighted that going forward commodities and currency will
continue to be volatile in the near term.
 On Effective Tax Rate (ETR): ETR before corporate tax rate cut announcement was 30.5% for FY20. Post
the announcement HUVR will moves to 25.2% nominal tax rate cut. However, due to Deferred Tax Asset

03
 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

and disallowances the ETR for FY20 will be 27% while from FY21 onwards it will stand at 26%. We note
that all these tax rates are excluding the GSK Consumer merger.
 On delay in GSK Consumer merger: Merger with GSK consumer may get delayed by one month to
January 2020. Final hearing in NCLT Mumbai is within 2 weeks time while it has taken a longer than
expected time in NCLT Chandigarh, leading to the delay in jurisdiction of GSK Consumer.
 On Channel disruptions: Disruption in logistics and supply chain were witnessed during the quarter
owing to floods in many parts of the country. HUVR has supported its distributors by selectively
increasing their credit period. Management mentioned large distributors are well placed and did not face
any liquidity issues as such.
 Growth across Channels: While across the market slowdown is reported within channels, Modern Trade
is growing faster than General Trade. However, management is hopeful that with various policy
interventions and measures from the Government and Monetary policy (interest rate cuts of 75bps over
last 6 months) there could be some percolation getting to the ground and thus demand uptick could be
possible in H2FY20. Although quantum of growth will need to be monitored and will come along over a
period of time.

 Outlook: Revenue was in line, while margins came in ahead of our estimates. Further as GSKCH merger
(final approvals awaited) gets consolidated there could be a 7-9% addition to EPS in FY21E. Although the
near-term outlook on rural demand remains challenging, but good monsoon coupled with festive demand
may prove to be the positive triggers. While from the long term perspective four key trends that will
particularly drive higher earnings growth for HUVR are 1) its agility and nimbleness to adapt to market
requirements, 2) strong execution on the Naturals portfolio and recognizing its importance, 3) strong and
continued trend towards premiumization and 4) extensive plans to employ technology, use data analytics,
WIMI strategy are sure to create a strong moat for the company going ahead. Given, that HUVR offers
most earnings (Revenue/EBITDA/PAT CAGR to be 11%/17%/18% over FY19-22E) visibility with healthy
return rations we believe, its premium valuation will remain and are thus justified. Factoring in the boost
HUVR’s earnings will get from transitioning to new corporate tax rate our TP undergoes a revision from
Rs. 1,830 earlier to Rs. 2,175 with 48x Sept 21 EPS with“HOLD” rating on the stock.

 Key Risks to our call are 1) rural demand not picking up; 2)sharprise in raw material inflation 3) re-
emergence of competition from local/ regional brands and other organized players; 4) further delay in
integration of GSK Consumer merger and challenges thereof.

04
 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

UVG(%) growth resilient despite high base and GM expansion, Cost saving initiatives drive 290bps
slowdown in demand YoY expansion in reported EBITDA Margin (%)

14 12
11 11 30 26.3
12 10 24.8
10 10 23.7 23.3
25 21.7 22.5 21.921.4
7 7
8 6 6 19.3 18.4 20.1 20.0 20.2
6 5 5 20 17.3 19.0 17.9 19.6
4 4 4 4 17.6
4 15
2 0
0 10
-2
-1 5
-4
-6 -4 0
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20

Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Source: Company, Axis Securities

Moderation in Domestic FMCG growth momentum Innovation pipeline continues to be healthy supported
dragged by weak popular segment in personal wash(%) by A&SP investments in brands(%)

18 17
16 16 14 11.911.9 12.9 12.2 12.4
16 12.3
11.4 11.2 10.9 11.5 11.8 12.0 11.1 11.9
14 13 13 12 10.6 11.3
10.8 10.4
12 10
10
10 9
(%)

8 8
7 7
%

8
6 6
6 5 5
4
4 3 4 4
2
2 2
0
0 0
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20

Q3FY19
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19

Q4FY19
Q1FY20
Q2FY20
Source: Company, Axis Securities

P/E Band 12 month Forward P/E (x)

70 2500
60
2000
50
40 1500
30
1000
20
10 500
0
0
Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Feb-19
Oct-13

Jun-14
Oct-14

Jun-15
Oct-15

Jun-16
Oct-16

Jun-17
Oct-17

Jun-18
Oct-18

Jun-19
Oct-19

Mar-14

Jan-15

Mar-19
Feb-17

May-18
Oct-13

Jun-15

Oct-18
Apr-16

Dec-17
Aug-14

Nov-15

Sep-16

Aug-19
Jul-17

PE Mean Mean+1Stdev Mean-1Stdev Price 15x 30x 45x 60x

Source: Company, Axis Securities

05
 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Results Update (Standalone)

Quarterly Performance

% Change
(Rs.Cr.) Q2FY20 Q2FY19 Q1FY20 % Change (QoQ)
(YoY)
Volume Growth (%) 5.0 10.0 -500bps 5.0 -
Net Sales 9,708.0 9,138.0 6.7 9,984.0 -2.8
Other Op. Inc 144.0 96.0 130.0
Total Revenue 9,852.0 9,234.0 6.6 10,114.0 -2.6

Expenditure
Net Raw Material 4,485.0 4,435.0 1.1 4,648.0 -3.5
Employee expenses 430.0 438.0 -1.3 452.0 -4.9
Other Exp 1,296.0 1,236.0 4.9 1,206.0 7.5
A&SP 1,198.0 1,106.0 8.3 1,161.0 3.2
Total Expenditure 7,409.0 7,215.0 2.7 7,467.0 -0.8

EBIDTA 2,443.0 2,019.0 21.0 2,647.0 -7.7

EBITDA Margin (%) 24.8% 21.9% +293bps 26.2% -137bps
Oth. Inc. 180.0 305.0 -41 147.0 22.4
Interest 31.0 7.0 342.9 24.0 29.2
Depreciation 237.0 130.0 82.3 214.0 10.7
Exceptional Item -47.0 -47 7.0
PBT 2,355.0 2,152.0 7.2 2,563.0 -9.9
Tax 460.0 627.0 -26.6 808.0
PAT 1,848.0 1,525.0 21.2 1,755.0 5.3
Share of profit of Associates - - -
Adjusted PAT 1,848.0 1,525.0 14.8 1,755.0 5.3
EPS (Rs.) 8.6 7.1 8.1

Ratios (% of Net Sales)

Gross Margin (%) 54.5 52.0 +250bps 54.0 +43bps

EBITDA Margin (%) 24.8 21.9 +293bps 26.2 -137bps

PAT Margin (%) 19.1 16.8 +235bps 17.3 +183bps

Material Costs 45.5 48.0 -250bps 46.0 -43bps

Employee Cost 4.4 4.7 -38bps 4.5 -10bps

A&SP 12.2 12.0 +18bps 11.5 +68bps

Other Expenses 13.2 13.4 -23bps 11.9 -123bps

Income Tax Rate (%) 19.9 29.1 -920bps 31.5 -1160bps
Source: Company, Axis Securities

06
 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Results Update (Standalone) (Cont’d)

% Change % Change
Segmental Performance Q2FY20 Q2FY19 Q1FY20
(YoY) (QoQ)
Revenue Contribution

Home Care 3,371.0 3,080.0 9.4 3,465.0 -2.7

Beauty & Personal Care 4,543.0 4,316.0 5.3 4,589.0 -1.0

Food & Refreshments 1,847.0 1,704.0 8.4 1,950.0 -5.3

Others (incl Exports, Water and Infant etc) 91.0 134.0 -32.1 110.0 -17.3

Total Segment Revenues 9,852.0 9,234.0 6.7 10,114.0 -2.6

EBIT

Home Care 595.0 497.0 19.7 699.0 -14.9

Beauty & Personal Care 1,315.0 1,138.0 15.6 1,358.0 -3.2

Food & Refreshments 294.0 295.0 -0.3 379.0 -22.4

Others (incl Exports, Water and Infant etc) 2.0 2.0 - 2.0 -

Total Segment EBIT 2,206.0 1,932.0 14.2 2,438.0 -9.5

EBIT Margin (%)

Home Care 17.7 16.1 +151bps 20.2 -252bps

Beauty & Personal Care 28.9 26.4 +257bps 29.6 -65bps

Food & Refreshments 15.9 17.3 -140bps 19.4 -352bps

Others (incl Exports, Water and Infant etc) 2.2 1.5 +71bps 1.8 +38bps

Total 22.4 20.9 +147bps 24.1 -171bps

Source: Company, Axis Securities

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 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
Regulations).

1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as
defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of
various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s
largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking,
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 17 OCT 2019 Quarterly Update
HINDUSTAN UNILEVER
FMCG

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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09