Hindustan Unilever’s (HUL’s) Q1FY19 revenue, Ebitda and adjusted PAT growth of 11.2%, 20.6% and 22.5%, respectively, came in line with our estimates. The 12% y-o-y volume growth also came in line with our estimate. What’s even more encouraging is that the growth was broad-based, aided by gradual improvement in demand. Gross margin expanded ~197bps on account of favourable mix and judicious pricing. Ebitda margin also rose 185bps y-o-y despite ad spends jumping 27.4% y-o-y (up 155bps y-o-y)—the right strategy in our view. New launches, performance of Indulekha & Ayush and revival of rural demand are potential triggers. Maintain Hold as from current level (52.7x FY20e EPS), the stock offers limited upside.
On a comparative basis, sales grew 16% y-o-y . Key catalysts were: (i) home care segment jumped 20% y-o-y aided by key brands posting double-digit growth; premiumisation aided 443bps y-o-y Ebit margin expansion; (ii) beauty & personal care segment grew 14% y-o-y led by broad-based growth across personal products, personal wash and new launches; (iii) foods & refreshments jumped 14% y-o-y fuelled by tea, ice creams and frozen desserts segment as well as Kissan and Knorr brands.
Q1FY19 conference call: Key takeaways
Markets across rural and urban areas are seeing positive trend. Premiumisation in home care is happening at 100bps p.a. Indulekha continues to do well on pan-India. HUL is looking to tweak strategy for Lever Ayush for Central and North India. Overall Distribution Centres will come down from 40 to 20 and company is also looking to further optimise supply chain which should further yield cost savings.
Outlook and valuations: Long-term positive; maintain ‘HOLD’
We envisage HUL to be key beneficiary of the anticipated rural recovery and herbal push. We estimate better-than-expected volume growth (trend too indicates the same) and with rural reviving, we raise our target multiple to 55x (earlier 50x) and arrive at revised target price of Rs 1,887 (earlier Rs 1,647) on FY20e EPS. We maintain ‘HOLD/SP’ as from current level (52.7x FY20e EPS), the stock offers limited upside.
We remain positive on HUL’s ability to outpace market growth and its pricing power underpinned by distribution expansion, deepening direct reach and product innovation initiatives. Despite tough market conditions with GST rollout from July, 2017, the company efficiently managed volumes. With recent GST rate reduction, HUL also tends to benefit by either reducing MRP or offering higher grammage. Pricing growth is now returning, which along with pick-up in volumes is likely to boost overall revenue growth to double digits. Also, GST and e-way bill will create a level playing field, rendering a large organised player like HUL the biggest beneficiary.
Cost savings and mix improvement are bound to spur margin structurally—HUL’s margin has improved over the past seven consecutive years. Margin, going forward, is expected to further improve aided by cost-saving initiatives such as zero-based budgeting, efficiency in ad spends, etc.