Hindustan Unilever: Q2 FY12

• Q2 revenues ahead of expectations - increased by 18% yoy to Rs55bn driven by strong ~20/17% yoy growth in HPC/Foods business respectively. Domestic FMCG business witnessed a strong underlying volume growth of 9.8% 
• Operating margin expanded by 130bps to 13.4% aided by sharp 270/200bps drop in overhead/advertising costs respectively
• Personal products segment witnessed 140bps expansion in EBIT margins on a low base while Soaps and Detergents segment margins expanded by 60bps
• Net profit surpassed expectations by registering 22.6% yoy increase at Rs6.4bn driven by strong topline growth and improved operating efficiency. APAT after extraordinary income of Rs444mn increased by 21.7% yoy to Rs6.9bn
• We maintain Market Performer rating with a revised 9-mth target price of Rs358

Result table

Source: Company, India Infoline Research

Revenue growth ahead of expectations

HUL Q2 FY12 results surprised us positively with a revenue and PAT growth of ~18/23% respectively. Revenues surged by 18% yoy to Rs55bn (our expectation ~Rs54bn), driven by 20.5% and 17% yoy growth in HPC and Foods segments respectively. Domestic FMCG business witnessed a strong underlying volume growth of 9.8%. This was mainly on account of HUL’s aggressive marketing strategy, various re-launches and brand extensions.

Revenue break-up

Source: Company, India Infoline Research

The core Soaps and Detergents segment; contributing ~46% to revenues and ~38% to EBIT, outperformed the industry by registering 21.8% yoy growth at Rs25.9bn (double digit growth in Rin, Surf, Wheel, Lux and Lifebuoy, strongest quarter for skin cleansing segment). Personal products segment recorded 18.2% yoy growth at Rs16.1bn primarily led by strong growth in skin care segment (double digit growth in all the key brands - Fair and Lovely, Vaseline, Ponds). Beverages segment registered 14.6% yoy growth in revenues with double digit growth in all brands. Revenues from the packaged foods segment witnessed 20.9% yoy increase at Rs3.3bn driven by strong growth in Kissan and Knorr.

Segment-wise revenue trend

Source: Company, India Infoline Research

Segment-wise EBIT trend

Source: Company, India Infoline Research

Sharp drop in overhead and advertising cost fuels operating margins

Strong 130bps expansion in operating margins at 13.4% came as a positive surprise (our expectations of ~12%). A sharp 270bps and 200bps reduction in adspend and overhead cost fuelled the margin expansion. The expansion could have been even better but for the 340bps increase in raw material cost. We expect competitive intensity in the key categories (like soaps, detergents and shampoos) will compel the company to increase adspend in the coming quarters. This coupled with firm input prices will keep margins under check.

Cost analysis

Source: Company, India Infoline Research

Improving Soaps and Detergent margins will be a challenge

Soaps and Detergents segment EBIT margins expanded by 60bps to 12.4%. Given the competitive intensity in such a key segment, improving/maintaining margins will be a challenge for the company. Personal products segment witnessed healthy 140bps expansion in EBIT margin at 24.4% on a low base. On qoq basis the margins, however, have declined by 90bps. Beverages and Packaged foods segment EBIT margins contracted by 190bps and 70bps yoy respectively.

Extraordinary income of Rs444mn fuels net profit growth

Net profit for the quarter surpassed our expectations of Rs5.8bn by recording 22.6% yoy growth at Rs6.4bn led by strong topline growth and improved operating efficiency. Adjusted net profit after extraordinary income of Rs544mn increased by 21.7% yoy to Rs6.9bn.

Extraordinary items

Source: Company, India Infoline Research

Competition in core categories to increase further

HUL is focusing on new growth categories like high-end personal care (skin, hair care), foods and water. Going forward, the competitive pressure is expected to increase with more players entering the personal care and toilet soaps segments, which accounts for 75% of HUL’s sales. Improving/maintaining EBIT margins in the Soaps and Detergent segment will be a challenge for the company. Requirement of higher adspend on account of severe competition in core categories and higher input cost could put pressure on operating margin. At the current market price of Rs375, the stock is trading at 28.3x FY13E EPS of Rs13.3. Maintain Market Performer rating with a revised 9-mth price target of Rs358 (earlier Rs324).

Financial summary

Source: Company, India Infoline Research