KARV Y ||| EEE odtber38,2012 Hindustan Unilever Rationale for “HOLD” Recommendation Our investment argument is based on following premises: |. Multiple Factors to Drive Business — HUL to Sustain Current Performance 2. Growth Momentum to Continue in S&D Segment 3. Operational Consistency in Personal Products Segment 1. Multiple Factors to Drive Business - HUL to Sustain Current Performance Hindustan Unilever (HUL) is the classic case of change in DNA with its sales growth, EBITDAM and valuation rising sharply as compared to the respective historical averages. Apart from showing robust performance in the past six-seven quarters, the counter has also improved visibility of its performance, going forward with the Compeny’s Management becoming more aggressive. Exhibit 5: HUL Consistently Surpassed Expectation Exhibit 6: Aggressive Launches & Re-launches 36 35 50 32 * 30 28 2» 24 10 i 1 20 ° rook, . QAR eR GFR oR GIES FYOS FYO6 FYO7 FYO8. FY) FYI FYE FZ Market Ad) EPS Rapectation Actual Adj EPS SsLaunches Relaunches Source: Bloomberg, Karey Distitutonal Research Source: Company, Karey Institutional Research Our View: HUL can sustain its current performance in ensuing period on the back of several drivers i.e. multiple launchesire-launches, expansion of distribution channel, aggressive activities at field level, and vigorous foray into low- penetration and high-margin opportunities with a thrust on premium products, 2. Growth Momentum to Continue in S&D Segment HUL surprisingly reported strong sales growth in S&D segment in the past four- five quarters, primarily driven by premiumisation, with better soaps growth in FY12 ~ although relatively slower than its competitors ie. GCPL, Wipro and Reckitt Benckiser ~ surpassing the growth recorded in the previous two fiscals, due to strong regional grip. In the detergent segment, HUL has shown sharp 29% growth in FY12 ~ far ahead of single digit growth recorded in FY10 & FYI1. We believe that this growth was a good mix of volume and price, with the price growth ahead of volume growth. Our View: Despite higher penetration level of S&D segment, rise in consumption- level amid rising consumers’ preference for branded products would aid HUL in registering healthy volume growth, going forward. 46KARVYiIIl Oe October 18,2012 Hindustan Unilever Exhibit 7: Soap Players’ Performance Exhibit 8: Detergent Players’ Performance Soaps FYOS FYO? FYIOFYIL__FYI2_ Detergent Fyos rye Fyio Fy Fv. HUL 8328S 92 HUL v8 329 4) 6 DVD Reckitt Benckiser 250361298 AS ML_Nirma 126 20 (196) (11.2)—ona Nirma G4 65 18 24) ona PRG m2 5 72 MO ona ocr, 193 260° 161 @9)_—«27 Rohit Surfactants 4.0244 DD_—ma— Wipro 26 264 «178124308 yothy Labs Ma uo?) Jyothy Labs (incHeake indigy 918° Source: Company, Karey Institutional Research 70 ty 74__‘iBe Het tniy Source: Company, Karey Institutional Resear Jun-09 Sep-09 Dec09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-I Jun-11 Sep-11 Dec-Il Marel2 Jun-I2 Exhibit 9: S&D Quarterly Performance Particulars Revenue (Rs mn) 2Al5 Revenue growth YoY ( 95 Revenue Mix (%) 488 BIT Margin (%) 172 PBI Mix (%) 524 20037 20719 19,785 22645 21,294 21,929 22048 25550 25925 25460 25381 31,631 09 24) (17) 24 63 58 MA BD DOT 8S 238 469 452 452 466 «HBSS 45H M63 AS92497 B6é 134 Be m0 m7 77 78 | 92 1s 135 | 3a 22 399 35317686 —«S_—TRO_254 909 _—HRA__36K__—GKA_=OS Source: Company, Karey Institutional Research 3. Operational Consistency in Personal Products Segment Hindustan Unilever (HUL) has wide range of products in Personal Products (PP) segment covering Skin Care, Oral Care, Hair Care and Personal Care products ete. This is the most critical segment for HUL accounting for ~30 of sales and ~50% of profitability of the Company. HUL has consistently maintained its superior operational performance despite stiff competition from the domestic and MNC players ie. Dabur, Marico, Emami, L/Oreal, Johnson & Johnson, P&G and Beiersdorf AG (Nivea) etc. though focus on premium segment, consistent new launches, brand extension. HUL's Skin care sub-segment ~ contributing ~50% to the segment’s EBITDA — looks to be more promising with tremendous growth potential owing to higher consumption, We believe that the PP segment would continue aid HUL on profitability front, going forward, as the change in consumers’ life style will result in higher consumption. Our View: Bulky product portfolio in each sub-segment would make HUL more competitive. Strong growth in skin care sub-segment would annul profitability pressure in other sub-segments i.e. shampoo and oral care, while enabling HUL to ‘maintain better profitability in the segment as a whole. aKARV Y ||| EEE Exhibit 10: Brand Extension October 18,2012 Hindustan Unilever Exhibit 11: Our Estimate for PP Business Mix Brand Presence Categories Sales Mix (%) EBITDA Mix (%) Dove _ Shampoo, Soap, Body Lotion, Deodorant, Conditioner, Hal CaF gyn Care 38% 8% VaselinePetroleur Jelly, Lip care, Body Lotion eats Soap, Face wash, Hand wash Shampoo 16% Pond's Skin Care, Tale, Face wash Liril Soap, Tale Oral Care 10% Lux Soap, Shampoo Sunsilk Shampoo, Conditioner Rexona Soap, Deodorant Lakme Skin Care, Color Cosmetics Color Cosmetics Deodorant Others Source: Company, Karay institutional Research Exhibit 12: PP Quarterly Performance Source Company, Karoy Institutional Research Particulars Jun-09 $ep-09_Dee-09 Jun-10_Sep-l0 Decl Mar-11_Jun-11 Sep-11 Dect Marl? Jun-l2 Revenue smn) 12255 11,902 13,770 15655 13,648 16547 14591 16307 16126 18862 17,109 18471 Revenue growth YoY (3s) 147 134155 4147) 202) 16294182 THO Revenue Mix 270 78 300-87 -—«-B1_—Ss«287_ 823-794-2982 28B_S1T-_—«287 290 PBIT Margin %) 20 %3 319-18 MB 28H HOH HA 259283. HH BET Mix (6) 370458 559 «52946472 H99——SBA_—«ABT. Source: Company, Kary national Resear Exhibit 13: HUL Business Snapshot Business Mix Sales Mix (%) Sales CAGR OH) |_PBIT Margin (2) PBITMix(%) __ PBITCAGR Ge) Fyo9 _FYI2 FYISE_FY012_FYI2A5E_FYO9_FYI2_FYISE_FY09_FYI2 FYISE_FY09-12 FYI245E Soapsand Detergents 474 «4 445/—03SABSCSO.CSNG CTO BAS Personal Products 238 99 313,286 49 42 095 29 M977 Beverages mo 12 103) a 7134 TKO WSS Foods 5058 67, 7d 212 1018 31 03 07 14 4452 ‘Sources Company, Karey Institutional Research Exhibit 14: Key Assumptions Key Assumptions Fyn AYRE FYIBE FYE FYISE, Soaps Sales Growth ( 57 92 103 m3 17 Detergents Sales Growth (%) 64 292 95 167 67 Personal Care Sales Growth (%) 160 9887 180 v8 Beverages Sales Growth (%) 94 uy 1st 126 26 Food Sales Growth (%) 235 m4 m2 22 22 EBITDA Change (bps) 1 se 8 73) Effective Tax Rate (6) 26 24 Bo 030 Source: Company, Karey Institutional Research 48KARV YI cuts Hindustan Unilever Financials - Consolidated it and Loss Statement YEE Mar (Rs mn) FY -FY2_=FYDE FYE Net Revenues 200,185 2436-27108 914,168 Growth ma wa 68158 Raw Material 102387 125017 140.195 160,589 Staff 10120 1200913717, S911 (Other Expenses 606s 62,502 75084 89,498, Total Expenditures 173140 199,527 229.995 265,998, EBITDA 270s 348374182 48,75, %% Growth a7 288 166 EBITDA Margins () Bs 49 153 (ther Income 2618 25963854023 ,3683 Interest 10 : - - Depreciation 2293 2316 2840 2.736 Profit Before Tax 27,360 35081 42,541 49,657 S77 Provision for tax 59198259784 aa. 13.37 fective tax rate (%) 26 B48 8028 Reported PAT 22960 27908-37188 38121 3,854 % Growth 65 S83 25 150 Adjusted Net Profit 21936 26998 32.652 3812143, 2% Growth 1768 ete ‘Source: Company, Karoy Isttutional Research Exhibit 16: Balance Sheet YE Mar (Rsma) oR AGE AWE YE [Equity Share Capital 21602462 DNDN. Reserves & surplus 25190 34649 42,120 Sod 864 ‘Shareholders’ funds 27350 © 36811 44.282 52,185 60,785, Minorities interests 149 183 287 403 a1 Total Debt : : - - - Capital Employed 27a 36998, 61316 Net fied assets 5,128 24,905 27312 (Cash fe Cash Eq, 17797 19,964 39561 Net Other current assets 29,343) 3,196) 376 37,091) Investments 11885 23,222 30019 Net Deferred tax Assets 2074 2,100 4315 Total Assets 2789936994 44569 5258861316 Source: Company, Karey Institutional Research 49KARVYiIIl STOCK BROKING Exhibit 17: Cash Flow Statement YE Mar (smn) rit ar 7380 Depreciation 2253 Tax. (6,710) Change in Wig Cap «sry CF from Operations 192855 Capex @2 Investment (6109) CF from Investing 27) (Change in Equity - (Change in Debt : Dividends & others (22,882) CF from Financing 22,842) (Change in Cash (6879) ‘Source: Company, Karey Institutional mh Exhibit 18: Key Ratios YE Mar FY Raw Material CostSales ¢ 51 %) Manpower Cost/Sales(%) Operating & Other Cost/Sales (6) Revenue Growth (6) aa EBITDA Margins (4) 135 Net Income Margins ( 107 ROCE (%) 98.4 780 ‘Sour: Company, Karey Institutional Research Exhibit 19: Valuation Parameters YE Mar FYI EPS (Rs) 99 PFE (%) 582 BY (Rs) 27 PPBV (3) 454 EV/EBITDA (3) 448 Fixed assets turnover ratio (x) 80 Net DebUEquity (3) as) Ev/Sales 6 ‘Source: Company, Karey Institutional Research FYI2 35,080 2,335 (6948) (7545) 20,502 2.738) 6,789) 629 (6442) (8.459) 69M FY2 October 18,2012 Hindustan Unilever FYE zn 2.316 (9.589) (1,850) 33417 (8,000) (4,798) (4,798) 25,181) 5,181) 3438 FYME W957 2.540 11.226) 2418 43,389 (2.500) (2,500) (6,000) 1 0218) (0217) zar wa 149 us 942 our 737. FYE FY oT 2.736 (12,982) 3m07 50239 (2.500) (2.500) (6,000) 5.254) (35,259) 8.986