HUL:: Revenue and PAT in line; beat at volume growth :: Edelweiss

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HUL - (HUVR IN, INR 306, Buy)
n Revenue and PAT in line; beat at volume growth
Hindustan Unilever’s (HUL) Q2FY11 revenue increased 10.7% Y-o-Y to INR 46.81 bn and
core PAT increased 2.6% to INR 5.35 bn. Accelerated 14% volume growth in Q2FY11
(against a base of 1% volume growth in Q2FY10) is even better than the performance in
Q1FY11 when HUL recorded 11% (against a base of 2% volume growth in Q1FY10)
volume growth. Robust growth in Personal Products (14.7%), Processed Foods (26.2%)
and Exports (16.6%) were able to offset muted sales growth in Soaps and Detergents
(6.3%), Beverages (9.3%) and Ice cream (9%).
n A&P down sequentially confirming ‘worse is behind’
Despite commodity inflation, company’s gross margin declined by just 20 bps following
cost savings program and buying efficiencies. The company’s EBITDA was down 8% at
INR 5.63 bn, recording 12.0% margins (decline of 240 bps Y-o-Y), following higher other
expenditure. Advertising and sales promotion (A&P) spend increased by 13% Y-o-Y (30
bps Y-o-Y) but slipped 190 bps sequentially from Q1FY11 indicating worse is behind in
terms of price cuts and promotional pressure. 70 bps sequential margin expansions in
soaps and detergents business (11.7% in Q2FY11 from 11% in Q1FY11) indicate that
margins have bottomed out in Q1FY11.
n Recent initiatives yielding results
More than 70% of HUL products have been re-launched in the past six months an d the
company wants to strengthen it further and has embarked on a plan to dramatically
expand its distribution network by adding 500,000 outlets to rural coverage. These
initiatives are yielding results which are reflected in superior volume growth and market
share gain across categories.
n Outlook and valuations: Positive; maintain ‘BUY’
HUL’s Q2FY11 result is a testimony of the underlying business turnaround and prudent
cost control which we have been suggesting for the past few months. We believe this
momentum will continue in the coming quarter with increased focus on new product
launches. We might revise our numbers and will come up with the detailed note post
conference call tomorrow.

n Other highlights
Despite commodity inflation, company’s gross margin declined by just 20 bps following
cost savings program and buying efficiencies. The company’s EBITDA was down 8% at
INR 5.63 bn, recording 12.0% margins (decline of 240 bps Y-o-Y), following higher other
expenditure. Advertising and sales promotion (A&P) spend increased by 13% Y-o-Y (30
bps Y-o-Y) but slipped 190 bps sequentially from Q1FY11 indicating worse is behind in
terms of price cuts and promotional pressure. Lower staff costs contributed 35 bps to
margin expansion.