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In our Q2FY15 Result Review dated Oct 30, 2014, we recommended investors to buy HUL on dips in the price band of Rs. 673-694 for a price target of Rs. 797 over the next quarter. Thereafter, the stock touched a new high of Rs. 967 on Jan 19, 2014. Expectations of HUL being a key beneficiary of commodity price fall led to a sharp rise in its share price. Currently, it is quoting at Rs. 908.3. Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods company, with leadership in Home & Personal Care Products. It is the market leader across diverse FMCG categories and has powerful brands like Rin, Surf Excel, Lux, Lifebuoy, and Ponds in its portfolio. HUL’s Q3FY15 results were below our estimates. We present an update on the stock. Q3FY15 Results Review Y-o-Y Net sales grew by 7.7% Y-o-Y to Rs. 75.79 bn [Q3FY14: Rs. 70.38 bn]. The Domestic Consumer business grew at 8% with subdued volume growth of 3% (below the street as well as our expectations). As per the management, the volume growth was lower because of a late arrival of the winter season that affected the sales of winter products and the black-out period in the soap category due to correction in the high-price inventory. Adjusting for these factors, overall volume growth would have been in line with growth achieved in the past few quarters. Home and Personal Care (HPC) reported growth of 6.2% Y-o-Y with personal products growing by 6.5% (which was disappointing, impacted by phase out of excise duty benefits in Oral care and hair care along with delayed onset of winter in Hand & Body portfolio) and Soaps & Detergents segment (growth impacted by phase out of fiscal benefits and lower growth in Dove due to late onset of winter) reporting growth of 6%. Foods business grew by 9.5%, driven by packaged foods (up 12.6%). Others category (which includes Exports, Chemicals & Water) grew by 27.8%. Gross margins improved by 117 bps Y-o-Y, led by relatively lower growth in material cost. Operating profit grew by 8.5%, while OPM improved by 14 bps Y-o-Y to 17.1% (14th straight quarter of margin expansion), driven by relatively lower growth in A&P cost (up 5.1% Y-o-Y) along with lower material cost. However, the OPM expansion was limited and below our estimates, impacted by higher staff cost (up 27.1% Y-o-Y) other expenses (up 11% Y-o-Y). On a segmental basis, Soaps & Detergents witnessed margin expansion, while Personal Products, Beverages & Packaged foods witnessed decline in their respectively EBIT margins (packaged foods margins in the negative). Others business managed to reduce its losses. Reported PAT grew at a faster rate by 17.9% Y-o-Y, aided by higher other income (up 211.9% Y-o-Y), which included exceptional item pertaining to profit on sale of surplus properties Rs. 4072.9 mn compared to Rs. 281 mn in Q3FY14. Depreciation & tax expense remained high (up 13.4% & 109.6% Y-o-Y). Effective tax rate on PBT increased by 1039 bps Y-o-Y to 29.3%. Adjusted PAT (excluding one-off gains) de-grew by 6.9% Y-o-Y. EPS (Adj.) for Q3FY15 stood at Rs. 4.5 vs. Rs. 4.8 in Q3FY14.
Other Highlights of the concall The management said that the overall market growth remained challenging in both volume and value terms. Market growth is one of the lowest in recent times. Market volumes declined in the quarter while value growth remained muted at sub 4% levels. Growth was led by small SKUs and lower price-point packs. In some categories like Hair, regional/unbranded players are ceding space to branded players. The management said that the overall market growth remains soft, especially in urban markets and large packs. Rural growth is showing initial signs of revival albeit sustainability of same is still uncertain. Modern trade too continues to witness weak growth. Steep decline in input costs has led to a step-up in competitive intensity in commodity-led categories like soaps and detergents. The management highlighted that it will remain agile in maintaining competitiveness of its brands and has readjusted pricing and pipeline of soaps & detergents portfolio with a weighted average cut of ~5%. The management expects overall pricing growth in ensuing quarters to remain weak, some categories may even post negative price-led growth, but there can be modest step-up in volume growth led by improving macro environment. The management said that it will continue to dynamically manage its business on both key variables of pricing and advertising/promotional spends to ensure best value to consumers. Its goal will remain modest margin improvement while remaining competitive in all categories/brands. The management stated that it will continue tightening in overheads irrespective of commodity costs savings or growth rates. Excise hike impact will continue to be felt on P&L for another two quarters until it gets in the base. Conclusion & Recommendation: HUL’s Q3FY15 results were below our estimates on all parameters, impacted by subdued growth across the segments, especially its key segments Soaps & Detergents and Personal Products (78% of the total revenues in Q3FY15 & 9MFY15). The volume growth of 3% was a big disappointment, impacted by late arrival of the winter season that affected the sales of winter products and the black-out period in the soap category due to correction in the high-price inventory. The growth in HPC was also impacted due to phasing out of excise duty benefits in Oral Care, Hair Care and Soaps & Detergents. Despite the expansion in the gross margins (117 bps Y-o-Y), aided by decline in the input cost, the improvement in OPM was limited (only 14 bps Y-o-Y; aided by low media intensity) on the back of higher staff (due to one-time provision of Rs. 385.3 mn towards select contested matters) & overhead cost. The reported PAT growth was supported largely by one off gains from the sale of surplus properties (Rs. 4072.9 mn), excluding which the net profit declined. In order to improve its volume growth and market share, the company has reduced the prices of some of its products to pass on the benefits of input cost decline. We expect this strategy to continue over the next few quarters, if the commodity prices (including crude oil prices) continue to remain low. This along with improvement in demand expected over the next few quarters could lead to recovery in volume growth (in high single digits to low double digits). Soft input prices could aid in Gross margin expansion, however, the same is unlikely to be significant, as the rise in the excise duty and the pricing actions would offset a large part of benefits of lower input prices. Price reduction could intensify the competition amongst the organised & players, especially in the soaps & detergent segment, as regional players could become more aggressive in a falling raw material price environment and result in higher than expected A&P spends, which could limit the expansion in OPM. We expect OPM expansion to be lower than expansion in Gross margins.
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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011094
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