Unilever’s announcement of sharpening focus on cost (20% operating margin by 2020, implying ~300bps plus expansion), exiting non-performing businesses and enhancing shareholder returns (announced buyback and increased dividends) is likely to have spillover effect on Hindustan Unilever (HUL) as well.
Akin to its parent, HUL has initiated a Zero Based Budgeting (ZBB) cost saving programme, which is bound to sharpen cost focus. Hence, we expect the company’s current margin expansion trend to sustain over the next 2·3 years. In our view, HUL is well placed to benefit from GST (tax rate to be 18% from current 23%), which along with return of pricing growth, bodes well for growth and margin. Also, the new Assam factory will entail tax savings. However, tepid rural recovery remains a concern
Apart from savings in other expenses (also aided by ZBB), we believe benefits can emanate from: ad spend rationalisation (up ~200bps from FY09 level; Unilever will produce 30% fewer ads as part of its cost-cutting drive); and employee costs, which had catapulted 30bps from 5.2% of sales in FY11 to 5.5% in FY16 (savings can also flow from consolidation of factories, warehouses under GST).
Moreover, HUL has been prudently exiting laggard businesses—rice export, BRU World Café, leather—and we expect it to also review performance of minuscule businesses like water purifiers, retail stores, packaged foods (globally, pruning focus on foods). Also, like parent, buyback cannot be ruled out (holds 67.2%); already, HUL will remit `21.9 billion to shareholders post NCLT nod. The company is increasingly following Unilever’s structure—division heads now also report to global function chiefs.
We remain positive on HUL from the long-term perspective led by pricing growth, likely market share gains from GST and margin improvement. We have factored in ~150bps EBITDA margin expansion by FY19 over FY17. However, rising competitive intensity in the herbal space and tepid rural recovery are concerns. Hence, we maintain ‘HOLD/SP’ with target price of `935.