Analyst corner | Retain ‘add’ on Hindustan Unilever, target price unchanged

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Published: June 20, 2019 1:24:16 AM

FY19 was another year of solid and consistent performance (eighth consecutive year of top line and margin improvement) with broad-based growth (led by home care).

We continue to stay impressed with HUL’s solid in-market execution, strong innovation machinery and relentless focus on portfolio premiumization and market development.

FY19 was another year of solid and consistent performance (eighth consecutive year of top line and margin improvement) with broad-based growth (led by home care). UVG inched up to double digits (after eight years) and revenue growth/ EBITDA margin also hit multi-year highs.

On B/S side, RoE inched up 700 bps aided by lower capex intensity and higher margin, while deterioration in working capital position (still negative and industry-leading) dragged FCF (down 2% YoY).

We continue to stay impressed with HUL’s solid in-market execution, strong innovation machinery and relentless focus on portfolio premiumization and market development. While valuations are rich, we believe, strong and superior quality of earnings deserves a premium multiple. We retain the ‘add’ rating; target price remains unchanged.

FY19 revenue, EBITDA and recurring PAT grew 11%, 19% and 18% YoY respectively; underlying domestic consumer business growth stood at 12% YoY led by ~10% volume growth. Underlying EBITDA margin expanded 130 bps led by savings in multiple cost heads (GM and A&P spends were flat Y-o-Y).

Home Care remained the star performer for third consecutive year delivering 15% sales growth and 27% EBIT growth (accounted for 37% of incremental EBIT, lower than 42% contributed by beauty & personal Care).

(1) Working capital position deteriorated a tad by 6 days of sales to negative 39 days of sales led by increase in receivables (by 4 days) and reduction in payables (by 6 days), (2) RoE improved for second consecutive year to 83% (up 700 bps YoY) aided by improvement in margin and lower capex intensity, (3) FCF dipped 2% YoY to Rs 49.9 bn despite an 18% Y-o-Y jump in CFO and lower capex intensity dragged by deterioration in working capital.

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