Hindustan Unilever

Accumulate

Satisfactory volume growth on high base and consumption slowdown CMP ` 1,693
HUL’s volume grew +5% YoY and operational results were in line with our Target / Upside ` 1,877 / 11%
estimate. We are positive about this as (1) the base was unfavorable
(+12%) and (2) the industry, across categories, is experiencing a slowdown. BSE Sensex 37,979
We expect the volume growth to remain in mid-single digit, due to an NSE Nifty 11,331
unfavorable base in next few quarters. Even a 6%+ volume growth is a
positive, given HUL’s size. In addition, the GM and EBITDA margin rise on Scrip Details
an unfavourable base (highest Q1 EBITDAM in 10 years+), indicates that Equity / FV ` 2,165mn / ` 1
margins have not peaked yet, and it may continue to gain from operating Market Cap ` 3,665bn
efficiency. However, lower rural growth (1x urban) remains a concern. In
addition, moderation in demand is likely to pressurize volume growth in US$ 53bn
H1FY20. Nevertheless, HUL is likely to benefit from the expected rise in the 52-week High/Low ` 1,870/` 1,477
government’s rural expenditure (farm loan waiver, rural stimulus, etc.). We Avg. Volume (no) 1,149,090
maintain our FY20E and FY21E EPS at ` 33.5 and `37.6 and TP of `1,877
(50x FY21E). Maintain Accumulate. NSE Symbol HINDUNILVR
Bloomberg Code HUVR IN
Profitability in-line with our estimates
Net sales was ` 101bn, up 6.6% YoY in Q1FY20– marginally below our Shareholding Pattern Jun'19(%)
estimate of ` 104bn. Underlying volume growth was 5% vs our estimate of Promoters 67.2
Result Update

6%. EBITDA rose 17.6% YoY to ` 26.5bn, with an EBITDA margin expansion
MF/Banks/FIs 6.9
of 240bps to 26.2%. A 150/20/70bps fall in other expense/employee
cost/A&P spends expanded the EBITDA margin by 240bps. RPAT rose FIIs 12.5
14.8% to ` 17.6bn. Excluding an extraordinary gain of ` 70mn (related to Public / Others 13.3
provision for restructuring and sale of assets), compared to an
extraordinary loss of ` 590mn in Q1FY19, APAT grew 10.1% YoY to ` Valuation (x)
17.5bn—in line with our estimate.
FY19A FY20E FY21E
Why HUL deserves high valuations P/E 58.5 50.5 45.0
Despite a high base, HUL continues to grow, in line with the industry. The
EV/EBITDA 42.0 36.8 32.6
margins continue to expand, which indicates high operational efficiency.
Considering the industry slowdown and its outperformance, we believe ROE (%) 81.9 89.8 90.6
that HUL’s valuations will remain high. In our recent updates, we had RoACE (%) 89.0 94.1 94.6
revised valuation multiples down for its peers: Dabur, GCPL, and Bajaj
Consumer Care. However, we believe the valuation gap between HUL and
peers will rise (20% premium vs 15% earlier), as it continues to report Estimates (` mn)
better growth and profitability. Therefore, we maintain our 50x FY21E FY19A FY20E FY21E
earnings, despite revision in valuations for peers (without considering the Revenue 382,240 415,017 454,523
GSK acquisition).
EBITDA 86,370 98,287 110,228
Q1FY20 Result (` Mn)
PAT 60,360 72,602 81,489
Particulars Q1FY20 Q1FY19 YoY (%) Q4FY19 QoQ (%)
EPS (`) 28.9 33.5 37.6
Revenue 101,140 94,870 6.6 99,450 1.7
Total Expense 74,670 72,360 3.2 76,240 (2.1)
EBITDA 26,470 22,510 17.6 23,210 14.0
Depreciation 2,140 1,270 68.5 1,340 59.7
EBIT 24,330 21,240 14.5 21,870 11.2
Other Income 1,470 1,350 8.9 1,180 24.6 VP Research: Sachin Bobade
Interest 240 70 242.9 70 242.9 Tel: +91 22 40969731
EBT 25,630 21,920 14.5 22,250 15.2 E-mail: sachinb@dolatcapital.com
Tax 8,080 6,640 21.7 6,890 17.3
RPAT 17,550 15,280 14.9 15,360 14.3
Associate: Nikhat Koor
APAT 17,480 15,880 10.1 16,090 8.6 Tel: +91 22 40969764
(bps) (bps) E-mail: nikhatk@dolatcapital.com
Gross Margin (%) 54.0 54.0 4 52.3 174
EBITDA Margin (%) 26.2 23.7 244 23.3 283
NPM (%) 17.4 16.1 125 15.4 191
Tax Rate (%) 31.5 30.3 123 31.0 56
EBIT Margin (%) 24.1 22.4 167 22.0 206

July 23, 2019

 Satisfactory performance across segments
The company posted strong performance across segments:
 Home care reported 10.1% sales growth and 130bps EBIT margin expansion
to 20.2%;
 Personal care reported 4.1% jump to ` 45.9 bn and 230bps EBIT expansion
to 29.6%, and
 Food and Refreshment posted 9.2% YoY sales growth to ` 19.5bn and EBIT
expanded by 110bps to 19.4%.
 Due to rural slowdown, the company witnessed pressure in economy soaps
category.
Exhibit 1: Performance in the segments
Particulars (` mn) Q1FY20 Q1FY19 YoY (%) Q4FY19 QoQ (%) Remarks
Home Care Fabric Wash, Household Care & Water
 Growth in Fabric wash driven by focus on
Revenue 34,650 31,460 10.1 35,020 (1.1) core and market development.
EBIT 6,990 5,940 17.7 6,190 12.9  Portfolio growth in Household care led by
Central and South markets, new variants
and relaunches.
EBIT Margin (%) 20.2 18.9 130.0 17.7 250.0  Focus on premium range in Purifiers.
New Go To Market model in place.
Beauty & Personal Care Personal Wash, Oral Care, Skin Care, Hair
Care, Deodorant & Colour Cosmetics
Revenue 45,890 44,070 4.1 43,930 4.5  Personal Wash growth driven by
EBIT 13,580 12,040 12.8 12,200 11.3 premiumization of the portfolio.
 Broad based growth in Skin Care across
EBIT Margin (%) 29.6 27.3 230.0 27.8 180.0
brands and segments.
 Good growth in Hair Care across the
range.
 Sustained double digit growth in Colour
cosmetics.
 Strong momentum in Close Up and Ayush
Oral Care.
Food & Refreshments Food & Refreshments
Revenue 19,500 17,850 9.2 19,160 1.8  Ice Cream and Frozen Desserts witnessed
strong delivery led by innovations.
EBIT 3,790 3,280 15.5 3,460 9.5  Beverages witnessed a reasonable
quarter.
EBIT Margin (%) 19.4 18.4 110.0 18.1 140.0  Core segments in Foods performed well.
Others
Revenue 1,100 1,490.0 (26.2) 1,340 (17.9)
EBIT 20.0 (20.0) NM 20.0 NM
EBIT Margin (%) 1.8 NM NM 1.5 NM
Total
Revenue 101,140 94,870 6.6 99,450 1.7
EBIT 24,380 21,240 14.8 21,870 11.5
EBIT Margin (%) 24.1 22.4 170.0 22.0 210.0
Source: DART, Company

July 23, 2019 2

 Exhibit 2: Change in estimates
FY20E FY21E
In ` mn New Old Change (%) New Old Change (%)
Revenue 415,017 425,588 (2.5) 454,523 466,317.3 (2.5)
EBITDA 98,287 97,422 0.9 110,228 108,470.4 1.6
Margin (%) 23.7 22.9 80 bps 24.3 23.3 100 bps
PAT 72,602 72,608 (0.0) 81,489 80,959 0.7
EPS (`) 33.5 33.5 (0.0) 37.6 37.4 0.7
Source: DART, Company

Other Concall Highlights

 Rural is growing at the same rate as urban (1x) compared to 1.6-1.8x pre
demonetization.
 Comparable EBITDA margin expanded +150 bps after adjusting for
accounting impact of Ind AS 116 on leases.
 Margin expansion was driven by improved mix, leverage in operating and
advertising spends and cost savings agenda.
 Moderation in demand witnessed in Q1. Modern trade (15-17% of topline)
is growing faster than general trade. E-commerce contributes 2-3% to
topline.
 Lux and Lifebuoy continues to witness slowdown. The company has
launched new variants to address volume led issue. In addition, HUL took 4-
6% price corrections in Lux and Lifebuoy.
 A&P led competition moderated in general trade. However, competition
increased in modern trade in select categories.
 GSK merger expected to complete in Q3FY20E.
 Close up and Ayush brands are gaining traction in oral care category.
However, Pepsodent continues to remain under pressure.
 EBITDA margin expansion would be moderate here on. Company is not likely
to report similar margin expansion in ensuing quarters.
 RM costs remains benign. Company does not expect RM inflation in the near
term.
 Management is optimistic on demand recovery in H2FY20 mainly due to
increased government spends in rural, improvement in liquidity and better
monsoon performance.
 Rin brand was relaunched nationally this quarter.
 National launches of Lux Botanicals and Pears Naturale range in the
premium segment
 Sunsilk shampoo with natural ingredients - Coconut and Aloe vera launched
in Q1FY20 to enhance presence in naturals range.
 Sunlight liquid launched in Kerala, in line with company’s strategy of building
portfolio in liquid detegents.

July 23, 2019 3

Exhibit 3: Trend in revenue growth (%) Exhibit 4: Trend in domestic volume growth (%)
14 14 11 11 12
11.5 11.3
10.8 11.2 11.1 10 10
11 9.3 10
7
6.4 5.9 6.6 7 5
7 4.9 4 4
3.6 3
4 1.4
0
0 4 0
(3) -1
(0.7) -4
(3) (7)
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20

Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: DART, Company Source: DART, Company

Exhibit 5: Trend in gross margins (%) Exhibit 6: Trend in EBITDA margins (%)
57 28 26.2
54.5 54.0 54.0 26
55 53.8 23.7 23.3
22.5
52.152.7 52.6 52.0 52.3 24 21.9 21.921.4
52 51.3 51.451.0 22 20.1 20.1 20.219.6
49.5 20 17.9 17.6
50 18
47 16
14
45 12
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20

Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Source: DART, Company Source: DART, Company

Exhibit 7: Ad spends as a % of sales Exhibit 8: Commodity prices (Palm Oil)- ` /MT

14 65,000
12.9 60,000
13 12.3 12.2 12.012.4
11.8 55,000
12 11.5 11.5 50,000
10.8 10.9 11.1
11 10.4 10.6 45,000
40,000
10 35,000
9 30,000
25,000
8
20,000
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20

Feb-17

Feb-18

Feb-19
Oct-16

Oct-17

Oct-18
Aug-16

Aug-17

Aug-18
Jun-16

Jun-17

Jun-18

Jun-19
Apr-17

Apr-18

Apr-19
Dec-16

Dec-17

Dec-18

Source: DART, Company Source: DART, Company

July 23, 2019 4

 Profit and Loss Account
(` Mn) FY18A FY19A FY20E FY21E
Revenue 345,250 382,240 415,017 454,523
Total Expense 272,490 295,870 316,730 344,294
COGS 162,320 179,600 195,001 212,654
Employees Cost 17,450 17,470 18,138 18,956
Other expenses 92,720 98,800 103,591 112,685
EBIDTA 72,760 86,370 98,287 110,228
Depreciation 4,780 5,240 5,680 5,913
EBIT 67,980 81,130 92,607 104,315
Interest 200 280 308 339
Other Income 5,690 6,640 9,849 10,675
Exc. / E.O. items (620) (2,270) 0 0
EBT 72,850 85,220 102,148 114,652
Tax 20,480 24,860 29,546 33,163
RPAT 52,370 60,360 72,602 81,489
Minority Interest 0 0 0 0
Profit/Loss share of associates 0 0 0 0
APAT 52,990 62,630 72,602 81,489

Balance Sheet
(` Mn) FY18A FY19A FY20E FY21E
Sources of Funds
Equity Capital 2,165 2,165 2,165 2,165
Minority Interest 0 0 0 0
Reserves & Surplus 68,590 74,430 82,953 92,520
Net Worth 70,755 76,595 85,118 94,685
Total Debt 0 0 0 0
Net Deferred Tax Liability (2,550) (3,390) (3,390) (3,390)
Total Capital Employed 68,205 73,205 81,728 91,295

Applications of Funds
Net Block 41,420 43,430 40,250 36,837
CWIP 4,300 3,730 3,730 3,730
Investments 31,110 29,490 29,490 29,490
Current Assets, Loans & Advances 77,735 80,085 98,286 118,906
Inventories 23,590 24,220 25,861 28,331
Receivables 11,470 16,730 17,864 19,570
Cash and Bank Balances 33,730 36,880 52,154 68,368
Loans and Advances 8,945 2,255 2,407 2,637
Other Current Assets 0 0 0 0

Less: Current Liabilities & Provisions 86,360 83,530 90,028 97,669

Payables 68,720 70,240 75,166 82,344
Other Current Liabilities 17,640 13,290 14,863 15,324

Net Current Assets (8,626) (3,445) 8,258 21,238

Total Assets 68,205 73,205 81,728 91,295
E – Estimates

July 23, 2019 5

 Important Ratios
Particulars FY18A FY19A FY20E FY21E
(A) Margins (%)
Gross Profit Margin 53.0 53.0 53.0 53.2
EBIDTA Margin 21.1 22.6 23.7 24.3
EBIT Margin 19.7 21.2 22.3 23.0
Tax rate 28.1 29.2 28.9 28.9
Net Profit Margin 15.2 15.8 17.5 17.9
(B) As Percentage of Net Sales (%)
COGS 47.0 47.0 47.0 46.8
Employee 5.1 4.6 4.4 4.2
Other 26.9 25.8 25.0 24.8
(C) Measure of Financial Status
Gross Debt / Equity 0.0 0.0 0.0 0.0
Interest Coverage 339.9 289.8 300.7 307.9
Inventory days 25 23 23 23
Debtors days 12 16 16 16
Average Cost of Debt
Payable days 73 67 66 66
Working Capital days (9) (3) 7 17
FA T/O 8.3 8.8 10.3 12.3
(D) Measures of Investment
AEPS (`) 24.5 28.9 33.5 37.6
CEPS (`) 26.7 31.4 36.2 40.4
DPS (`) 21.5 25.2 29.6 33.2
Dividend Payout (%) 87.8 87.2 88.3 88.3
BVPS (`) 32.7 35.4 39.3 43.7
RoANW (%) 77.2 81.9 89.8 90.6
RoACE (%) 80.9 89.0 94.1 94.6
RoAIC (%) 167.7 229.2 281.1 397.4
(E) Valuation Ratios
CMP (`) 1693 1693 1693 1693
P/E 69.2 58.5 50.5 45.0
Mcap (` Mn) 3,665,425 3,665,425 3,665,425 3,665,425
MCap/ Sales 10.6 9.6 8.8 8.1
EV 3,631,695 3,628,545 3,613,272 3,597,058
EV/Sales 10.5 9.5 8.7 7.9
EV/EBITDA 49.9 42.0 36.8 32.6
P/BV 51.8 47.9 43.1 38.7
Dividend Yield (%) 1.3 1.5 1.7 2.0
(F) Growth Rate (%)
Revenue 8.3 10.7 8.6 9.5
EBITDA 20.3 18.7 13.8 12.1
EBIT 20.3 19.3 14.1 12.6
PBT 13.9 17.0 19.9 12.2
APAT 24.7 18.2 15.9 12.2
EPS 24.7 18.2 15.9 12.2

Cash Flow
(` Mn) FY18A FY19A FY20E FY21E
CFO 66,860 66,120 82,160 90,975
CFI (1,550) (5,060) (2,500) (2,500)
CFF (48,290) (57,910) (64,387) (72,261)
FCFF 58,630 59,440 79,660 88,475
Opening Cash 16,710 33,730 36,880 52,154
Closing Cash 33,730 36,880 52,154 68,368
E – Estimates

July 23, 2019 6

 DART RATING MATRIX
Total Return Expectation (12 Months)
Buy > 20%
Accumulate 10 to 20%
Reduce 0 to 10%
Sell < 0%

Rating and Target Price History

Month Rating TP (`) Price (`)

(`) HUVR Target Price May-18 Accumulate 1,614 1,516
1,970
Jul-18 Accumulate 1,844 1,751
1,820 Oct-18 Accumulate 1,848 1,570
Dec-18 Accumulate 1,961 1,808
1,670
Jan-19 Accumulate 1,877 1,744
1,520 May-19 Accumulate 1,877 1,669
1,370

1,220
Jul-18

Jul-19
Jan-18

Jun-18

Aug-18
Sep-18

Nov-18
Dec-18
Jan-19

Jun-19
Feb-18
Mar-18
Apr-18

Oct-18

Feb-19
Mar-19
May-18

Apr-19
May-19

*Price as on recommendation date

DART Team
Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747

Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com +9122 4096 9709
Kartik Sadagopan VP - Equity Sales kartiks@dolatcapital.com +9122 4096 9762
Kapil Yadav VP - Equity Sales kapil@dolatcapital.com +9122 4096 9735
Ashwani Kandoi AVP – Equity Sales ashwanik@dolatcapital.com +9122 4096 9725
Lekha Nahar Manager – Equity Sales lekhan@dolatcapital.com +9122 4096 9740
Equity Trading Designation E-mail
P. Sridhar SVP and Head of Sales Trading sridhar@dolatcapital.com +9122 4096 9728
Chandrakant Ware VP - Sales Trading chandrakant@dolatcapital.com +9122 4096 9707
Shirish Thakkar VP - Head Domestic Derivatives Sales Trading shirisht@dolatcapital.com +9122 4096 9702
Kartik Mehta Asia Head Derivatives kartikm@dolatcapital.com +9122 4096 9715
Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com +9122 4096 9705

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