In line results; sharp increase in tax outgo… • Hindustan Unilever’:: ICICI Securities PDF link

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In line results; sharp increase in tax outgo…
• Hindustan Unilever’s (HUL) Q2FY15 results were in line with our
estimates as earnings grew 8.1% on account of a 60 bps
improvement in operating margins despite higher tax outgo
• Revenues grew 10.6% to | 7465.5 crore with soaps & detergent
(S&D), personal products (PP), beverages & foods reporting 11.1%,
9.9%, 7.6% and 13.4% growth YoY, respectively. Volume growth
remained moderate at 5%
• Strong growth in S&D was mainly led by the skin cleansing segment
with Lifebuoy witnessing sustainable price led growth. In detergents,
Surf witnessed strong volume led growth
• EBITDA margins came in at 16.3%, (up 60 bps YoY) led by 170 bps
lower A&P expenditure. However, the benefit was offset by higher
raw material expenditure
Volume growth expected to remain low until FY15E
Being the country’s largest FMCG player, HUL’s volume growth has
decelerated in line with the economic downturn. Volume growth has
declined from ~13% (FY11) and ~9% (FY12) to ~4% in FY14. The
slowdown was largely on the back of a slowdown in urban discretionary
demand with rural growth remaining healthy. Going ahead, we believe
volume growth would remain muted until FY15E led by the slower revival
in GDP growth. However, we believe that as the economy revives and
growth gains traction HUL’s strong portfolio of brands across segments
would aid the company’s volume growth back to 6-7% annually.
Soaps & detergents to witness price led growth
S&D, HUL’s largest revenue contributing segment (~49% of sales in
FY14) witnessed modest CAGR of 12.6% in FY09-13 led by an equal mix
of volumes and prices. The pricing power of HUL is backed by the strong
leadership position of HUL in both segments (~40% of value share in
detergents and ~45% value share in soaps) and its presence across the
value pyramid in each of them. Going ahead, we believe that led by the
high penetration (~99%), volume growth in S&D would remain muted
and price growth would be the key revenue growth driver estimated at
11.7% CAGR (FY14-17E) for the segment. We believe that price led
growth would also be led by premiumisation in the segment with a revival
in urban demand in the economy.
Sustained healthy growth in personal product revenues soon
HUL’s PP (~29% of revenues, ~46% of PBIT in FY14) growth at 14.8%
CAGR (FY09-13) has been largely led by volumes following lower
penetration of oral, hair & skin care products in India and HUL’s
strengthening presence across these segments led by its strong brands,
Fair & Lovely, Ponds, Lakme, Clinic Plus, Close-Up, etc. However,
following the slowdown in discretionary demand, increasing competition
in PP segment and rejig in HUL’s largest PP brand (Fair & Lovely), its PP
sales witnessed a slowdown since Q3FY13. However, we believe, going
ahead HUL’s brand strength would revive sales growth in the segment to
15.5% CAGR (FY14-17E) as consumer demand gains traction.
Strong brands augur well for revival in demand
We expect the near term slowdown to keep HUL’s growth moderate until
H1FY15. However, with a revival in urban demand and strong brands in
growing aspirational segments, we believe HUL is strongly placed to
capture the booming consumer demand. We value the stock at 32x
FY17E EPS of | 23.9 arriving at a target price of | 755.

LINK
http://content.icicidirect.com/mailimages/IDirect_HUL_Q2FY15.pdf