J.P. Morgan -Hindustan Unilever Limited (HUVR IN)

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Hindustan Unilever Limited (HUVR IN) Q4FY14: In-line sales; modest margin expansion		Underweight Price: Rs580.90 25 Apr 2014 Price Target: Rs570.00 PT End Date: 30 Sep 2014

HUL reported Net sales, EBITDA and PAT (before exceptionals) growth of 9%, 11% and 7% y/y, respectively, for 4Q FY14. While sales growth was in-line, earnings growth was lower than our and street expectations on account of lower-than-expected margins and higher tax rate.
Volume growth moderated to 3% (JPMe: 3.5%, street: 3-4%, 3Q: 4%) affected by weak macro and fewer volume-led promotions for soaps & laundry. Growth would have been affected to some extent by drag on account of upstocking done ahead of transporter strike in base qtr (~+80bps impact in Q4FY13).Price growth continued to be ahead of volumes and was in-line at 6% (3Q:6%, 2Q:5%, 1Q: 3%). Sales for soaps & laundry segment grew 9.6%y/y led by pricing and better mix in laundry. Growth for personal products moderated to 8%. Hair care sustained volume led double digit growth. Skin care products registered single-digit growth in a slowing market aided by re-launch of FAL. Sales growth for beverages remained soft at 7.5% with price growth coming off and subdued growth for coffee. Packaged foods registered growth of 12.7% y/y.
Modest margin expansion led by lower than expected A&P spend. Gross margin expanded by 10bp y/y owing to judicious pricing and cost efficiencies offsetting firm input costs. A&P spends rose modestly by 2%y/y (-80bp y/y). Other expenses rose 15% y/y (+80bp y/y) led by increased royalty, freight and mould related costs. Employee costs grew 21% y/y (+50bp y/y). Operational income grew 60% y/y (above estimates). Overall EBITDA rose 11% with margins expanding 30bp y/y. A&P/sales at 12.1% was the lowest in past eight quarters led by lower promotional spend as advertising spends sustained at higher levels. Tax rate was 28% (+540bp y/y).
Segment-wise margin performance: S&D EBIT grew 10%, PP EBIT grew 5%. EBIT margin for the soaps & detergent segment was flattish (+10 bp y/y) supported by better price growth (lower promotions) which helped offset higher input cost (palm oil) inflation. EBIT margin for the personal products segment declined -80bp y/y on account of higher investments in oral care. Margin for beverages rose 190bp y/y.
Dividend for FY14 at Rs13/share (FY13: Normal dividend of Rs10.5/share and special dividend of Rs8/share)
Earnings call today at 6.30pm IST. Dial in Nos – 91 22 3940 60000/6000 5900. Passcode: 85942406#

Figure 1 HUL – Volume and Price/Mix growth trends Source: Company reports

Figure 2: HUL – A&P to sales ratio Source: Company reports

Table 1: HUL 4QFY14 Quarterly results
Rs mn

	Mar'13	Dec'13	Mar'14	YoY	QoQ
Domestic FMCG - HPC	49,605	55,749	54,072	9%	-3%
Domestic FMCG - Foods	11,673	11,996	12,751	9%	6%
Domestic FMCG	61,277	67,745	66,822	9%	-1%
Others	2,394	2,633	2,536	6%	-4%
Net Sales	63,671	70,378	69,358	9%	-1%
Operational Income	987	1,856	1,583	60%	-15%
Total Income	64,658	72,234	70,941	10%	-2%
Cost of Goods Sold	34,326	36,601	37,308	9%	2%
Gross Profit	30,333	35,633	33,633	11%	-6%
Staff Cost	3,123	3,477	3,783	21%	9%
Advertising	8,211	9,295	8,403	2%	-10%
Other Expenditure	9,281	10,593	10,671	15%	1%
Sales and Administration Cost	20,615	23,365	22,857	11%	-2%
Total Cost	54,940	59,966	60,166	10%	0%
EBITDA	9,718	12,268	10,776	11%	-12%
Other Income	1,058	1,427	1,506	42%	6%
Interest	60	182	53	-11%	-71%
Depreciation	614	644	658	7%	2%
PBT	10,102	12,868	11,571	15%	-10%
Current Tax	2,293	3,321	3,246	42%	-2%
Total Tax	2,293	3,321	3,246	42%	-2%
PAT	7,808	9,547	8,325	7%	-13%
Exceptional	64	1,076	397
Reported PAT	7,872	10,623	8,721	11%	-18%
Margin
Gross Margin	46.1%	48.0%	46.2%
EBITDA Margin	15.3%	17.4%	15.5%
Net Margin	12.3%	13.6%	12.0%
EBIT margin	16.0%	18.5%	16.8%
% of Sales
Cost of Goods	53.9%	52.0%	53.8%
Staff Cost	4.9%	4.9%	5.5%
Advertising	12.9%	13.2%	12.1%
Others	14.6%	15.1%	15.4%
Tax as % of PBT	22.7%	25.8%	28.1%

Source: Company reports

Table 2: HUL - Segment Details

Rs mn

Segment Revenue	Mar'13	Dec'13	Mar'14	YoY	QoQ
Soaps and Detergents	31,914	33,979	34,971	10%	3%
Personal Products	18,311	23,039	19,833	8%	-14%
Beverages	8,081	8,500	8,690	8%	2%
Packaged Foods	3,723	3,728	4,197	13%	13%
Others	2,502	2,766	2,958	18%	7%
Segment EBIT
Soaps and Detergents	3,830	4,509	4,217	10%	-6%
Personal Products	4,717	6,592	4,958	5%	-25%
Beverages	1,362	1,373	1,630	20%	19%
Packaged Foods	140	(134)	230	64%
Others	(181)	(135)	(251)
EBIT Margin
Soaps and Detergents	12.0%	13.3%	12.1%
Personal Products	25.8%	28.6%	25.0%
Beverages	16.9%	16.2%	18.8%
Packaged Foods	3.8%	NM	5.5%

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