Hindustan Unilever Rating Hold: Results largely in line with estimates

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Published: January 22, 2019 12:15:11 AM

HUVR's Q3FY19 results came largely in line with our estimates. While volume growth at 10% y-o-y was ahead (vs 8% y-o-y expected), lower pricing led to 12.4% y-o-y net sales growth.

Hindustan Unilever Rating ‘Hold’: Results largely in line with estimates

HUVR’s Q3FY19 results came largely in line with our estimates. While volume growth at 10% y-o-y was ahead (vs 8% y-o-y expected), lower pricing led to 12.4% y-o-y net sales growth. Ebitda margin expansion was healthy at 185bps y-o-y despite 76bps y-o-y gross margin decline. While HUVR continues to execute well, we believe sales and margin estimates leave no room for upgrades amidst normalised base going ahead and valuation (54x FY20 PE) makes risk-reward unattractive.

Home care: Home care maintained its strong growth trajectory with 14.8% y-o-y growth in Q3FY19 coming on a base of 20% y-o-y growth. Higher raw material prices and restructuring costs resulted in 8bps y-o-y dip in margins. Given recent correction in crude led raw materials, competitive intensity may again rise from P&G.
Beauty and personal care: Better winter season aided this segment and it witnessed growth of 11% y/y in Q3FY19 on a base of 17% y-o-y growth. Ebit margins jumped 98bps y-o-y to 25.6%.

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Food and refreshment: F&R segment saw growth of 9.9% y-o-y led by refreshment in Q3FY19 on a base of 18% y-o-y (in-line with 2 year CAGR). Ebit margin improvement was strong with 318bps y-o-y expansion aided by softer base.

Margins: Gross margin dipped by 76bps y-o-y (74bps y/y dip in Q2FY19) while Ebitda margin improved 185bps y-o-y. Reported Ebitda margin increase for the eighth consecutive quarter was led by 85bps y-o-y dip in staff costs, 48bps y-o-y dip in A&P and 128bps y-o-y dip in other expenses.

Key highlights from conference call: Demand in FMCG remains stable so far but macro economic volatility-led slowdown need to be closely watched. Competitive scenario remains largely stable. There is no change in commentary on margins, but reinvestment into supply chain will increase.

PT and view: HUVR continues to execute strongly with above industry volume growth coupled with steady margin expansion. However given stable demand conditions and high base going ahead, topline surprise looks unlikely. Margin expansion should still continue given benign RM and cost savings programme but is already baked into estimates. Valuations at 54x FY20 PE for 17% EPS CAGR thus leave limited upside on the table. Maintain Hold with revised price target of Rs 1,770 (as we roll over to 47x Mar 21 EPS).

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