1. Maintain neutral on Hindustan Unilever with revised target of Rs 840

Maintain neutral on Hindustan Unilever with revised target of Rs 840

Hindustan Unilever’s Q4FY16 performance was below expectations on net sales up 3.5% y-o-y to Rs 79.5 billion (est. Rs 80.5 billion)—led by underlying volume growth of 4% (est. 6%)

By: | Published: May 11, 2016 6:08 AM

Hindustan Unilever’s Q4FY16 performance was below expectations on net sales up 3.5% y-o-y to Rs 79.5 billion (est. Rs 80.5 billion)—led by underlying volume growth of 4% (est. 6%). EBITDA grew 17.7% y-o-y to Rs 14.7 billion (est. Rs 13.4 billion) and Adj. PAT grew 13.2% y-o-y to Rs 10.3 billion (est. Rs 9.4 billion).

Volume performance muted — 4% in 4QFY16. Adjusting for one offs like channel correction volume growth was 5%, still lower than expectations. Intrinsic growth in Personal Products was 7% (reported growth 2%). Gross margin expanded 340bp y-o-y to 52.6% (est. 50.7%). Increased staff costs (up 60 bp y-o-y) ad spends (up 30bp y-o-y) and higher other expenses (up 30bp y-o-y) partially offset the gross margin gains resulting in EBITDA margin expansion of 220bp y-o-y to 18.5% (est. 16.6%).

Soaps and detergents (S&D) posted 2.1% revenue growth while Personal Products (PP) division posted 2.8% growth. S&D margins expanded 120bp y-o-y to 14.5%, while PP margins expanded by 490bp y-o-y to 29.5%. Consumption demand environment is challenging with incremental slowdown in Rural India. Rural demand pressures and continued deflationary environment are the key near-term risks for HUVR, in our view. Valuations at 40.2x and 35.3x FY17E/FY18E EPS remain fair, in our view. Maintain neutral with revised target price of Rs 840 (value at 35x FY18 EPS).

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