IDFC maintains underperformer rating on Hindustan Unilever

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Updated: Jul 27, 2015 10:34 AM

Price cuts, product promotions to restrict margin expansion

Hindustan Unilever LimiteHUL’s volume growth at 6% was in line; however, revenue growth at 5.3% was impacted by higher price cuts/ promotions.

Hindustan Unilever (HUL) reported Q1 revenues of Rs 79.7 bn (estimated Rs 82.2 bn), Ebitda of Rs 15.1 bn (est. Rs 15.7 bn) and adjusted PAT of Rs 10.6 bn (est. Rs 11.8 bn).

Volume growth at 6% was in line; however, revenue growth at 5.3% was impacted by higher price cuts/ promotions. Revenues were impacted by 170 basis point due to a reduction in fiscal benefits. Ebitda (earnings before interest taxes depreciation and amortisation) margin (including operational income) was up 150bp to 18.6% led by a 380bp gross margin expansion. A 200bp increase in A&P (advertising and promotion) spends restricted Ebitda margin expansion. A 46% decline in other income and a 290bp increase in tax rates impacted adjusted PAT (profit after tax), which was up 3% at Rs 10.6 bn.

Key positives: Second quarter of double-digit revenue growth and a 200bp Ebit margin expansion in personal products.

Key negatives: Steep increase in A&P spends, miss on revenue growth. Impact on financials: We cut FY16 and FY17 earnings by 3%

Valuation & view: HUL’s foremost priority is to be competitive in the market and protect against market share loss to regional competition in a deflationary environment. The company will invest most of its commodity cost savings in price cuts/A&P spends, leaving for moderate margin expansion. In a slow market, incremental revenue growth per unit of investment is  bound to be low. Hence, we believe the stock price is factoring aggressive operating margin expansion estimates for the next two years. At 36.7xFY17e earnings; we also believe valuations are prohibitive.

Maintain Underperformer.


Result highlights

Volume growth of 6% was led by a pick-up across HPC (home and personal care) categories. Rural growth continued to decelerate and it forms 45% of HUL’s revenues. HUL believes given the low base in rural, a pick -up here is crucial to an overall pick-up. The overall 5.3% revenue growth was impacted by a 170bp excise impact, adjusting for which, revenue growth would be 7%. The impact of excise will phase out in the next two quarters.

Soaps & detergents: Volume growth offset by price cuts. Revenue growth was at 0.2%; adjusting for the impact of excise, revenue growth was at 2%. Soaps growth was led by Dove and Pears; however the mass end (Lifebuoy and Lux) is witnessing signs of slowdown. In detergents, growth was led by Surf and Rin, with Surf growing in double digits. Wheel growth continued to remain sluggish. In home care, Vim grew in double digits led by liquids and tubs formats. The management hinted that more price cuts could be in store, given the continued correction in commodity prices.

Personal products: Personal products growth was at 11.4%; adjusting for the excise impact, revenue growth was at 15%. The revenue growth was led by skin care and hair care. Skin care growth was led by double digit growth across Fair and Lovely, Pond’s, Lakme and Vaseline. Double digit growth in hair care was led by Dove, Tressemme and the re-launch of Clinic Plus. Colour cosmetics continued to grow at double digit levels led by Lakme. Oral care improved, led by Close Up, but Pepsodent growth continued to be subdued. Personal product Ebit margins expanded 200 bp to 29.6%, this is the highest Q1 margin in personal products since June 2004.

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