Hindustan Unilever (Q4 FY12)

CMP Rs416, Target Rs425, Upside 2.2%

• Q4 revenues matched our expectations by recording ~16% yoy growth at ~Rs57bn, driven by strong ~24% yoy growth in HPC segment. Domestic FMCG business witnessed a healthy underlying volume growth of 10% 
• Soaps and Detergents segment witnessed 380bps expansion in EBIT margins at 11.3% on a low base. Personal products segment margins expanded by 130bps to 26.3%
• Operating margins expanded by 130bps to 12.9% aided by 80bps/130bps reduction in adspend and overhead cost respectively. Net profit registered 35.6% yoy increase at Rs6.6bn driven by strong topline growth and improved operating efficiency. APAT after extraordinary items of Rs281mn increased by 20.6% yoy to Rs6.9bn
• We maintain Market Performer rating with a revised 9-mth target price of Rs425  

Result table

(Rs m)	Q4 FY12	Q4 FY11	% yoy	Q3 FY12	% qoq
Net sales	56,605	48,937	15.7	58,527	(3.3)
Material cost	(31,223)	(26,642)	17.2	(30,751)	1.5
Personnel cost	(2,751)	(2,346)	17.3	(2,741)	0.4
Advertising cost	(6,773)	(6,233)	8.7	(6,902)	(1.9)
Other overheads	(8,578)	(8,041)	6.7	(9,278)	(7.5)
Operating profit	7,280	5,675	28.3	8,856	(17.8)
OPM (%)	12.9	11.6	126 bps	15.1	(227) bps
Depreciation	(571)	(556)	2.6	(568)	0.4
Interest	(2)	(0)	900.0	(5)	(55.6)
Other income	1,754	1,350	29.9	1,650	6.3
PBT	8,461	6,469	30.8	9,933	(14.8)
Tax	(1,876)	(1,613)	16.3	(2,271)	(17.4)
Effective tax rate (%)	22.2	24.9	-	22.9	-
Adjusted PAT	6,585	4,856	35.6	7,662	(14.1)
Adj. PAT margin (%)	11.6	9.9	171 bps	13.1	(146) bps
Extraordinary items	281	836	(66.4)	(124)	(326.8)
Reported PAT	6,866	5,692	20.6	7,538	(8.9)
Ann. EPS (Rs)	12.2	9.0	35.5	14.2	(14.1)

Source: Company, India Infoline Research

Revenues in line with expectations
HUL Q4 FY12 revenues were in line with our expecations at Rs56.6bn – up 15.7% yoy, driven by 20.4% yoy growth in domestic FMCG business. Domestic FMCG business witnessed a strong underlying volume growth of 10% (9.1% in Q3 FY12).

Revenue break-up

	Q4 FY12	Q4 FY11	Growth	Q3 FY12	Growth
(Rs mn)	(3)	(3)	% yoy	(3)	% qoq
Domestic FMCG - HPC	44,802	36,239	23.6	44,706	0.2
Domestic FMCG – Foods	10,144	9,415	7.7	9,640	5.2
a) Domestic FMCG – Total	54,946	45,654	20.4	54,346	1.1
b) Others	1,659	3,283	(49.5)	4,097	(59.5)
Total (a+b)	56,605	48,937	15.7	58,443	(3.1)

Source: Company, India Infoline Research

The core Soaps and Detergents segment; contributing ~49% to revenues and ~37% to EBIT, outperformed the industry by registering 28.4% yoy growth at Rs28.3bn (strong double digit growth across all brands). Personal products segment recorded 17.1% yoy growth in revenues at Rs17.1bn primarily led by strong growth in skin care segment (double digit growth in all the key brands - Fair and Lovely, Vaseline, Ponds). The growth could have been better but for the slower growth in toothpaste and shampoo segments due to intense competition. Beverages segment registered 7.6% yoy growth in revenues with double digit growth in coffee. Revenues from the packaged foods segment witnessed mere 9.7% yoy increase at Rs3.5bn driven by Kissan and Kwality Walls (muted growth in Knorr impacted by slowdown in market).

Segment-wise revenue trend

Segments	FY11				FY12
(Rs m)	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Soaps & Det.	22,645	21,294	21,929	22,075	25,550	25,926	26,481	28,344
Personal Prod.	13,655	13,649	16,547	14,609	16,307	16,126	18,877	17,109
Beverages	5,378	5,700	6,022	6,347	6,086	6,533	6,709	6,832
Pkged Foods	3,158	2,744	2,700	3,174	3,721	3,318	3,067	3,481
Others	3,774	4,174	4,020	3,414	4,129	4,070	4,361	1,823
Total	48,609	47,560	51,218	49,618	55,793	55,973	59,495	57,588

Source: Company, India Infoline Research

Segment-wise EBIT trend

Segments	FY11				FY12
(Rs m)	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Soaps & Det.	2,488	2,501	1,693	1,650	2,361	3,212	3,559	3,201
Personal Prod.	3,388	3,140	4,769	3,652	4,133	3,940	4,881	4,492
Beverages	695	876	1,014	993	754	877	1,052	984
Pkged Foods	259	155	(166)	46	174	165	(60)	(37)
Others	(39)	6	42	152	211	162	344	(49)
Total	6,790	6,678	7,351	6,494	7,632	8,357	9,776	8,591

Source: Company, India Infoline Research

Lower advertising and overhead cost fuels operating margins
Operating margins for the quarter expanded by 130bps to 12.9%, fuelled by a 130bps/80bps reduction in overhead cost and adspend. The expansion could have been even better but for the 70bps increase in raw material cost. Over the past 3-4 quarters HUL has strategically reduced adspend to protect operating margins. However, we believe going ahead this will not be a key factor for margin expansion as adspend base starts moderating. 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

As a % of net sales	Q4 FY12	Q4 FY11	bps yoy	Q3 FY12	bps qoq
Material cost	55.2	54.4	72	52.7	246
Personnel cost	4.9	4.8	7	4.7	17
Advertising cost	12.0	12.7	(77)	11.8	16
Other overheads	15.2	16.4	(128)	16.1	(95)
Total costs	87.1	88.4	(126)	85.3	183

Source: Company, India Infoline Research

Soaps and Detergents EBIT margins witness sharp 380bps expansion, though on a low base
Soaps and Detergents segment EBIT margins expanded by 380bps to 11.3% though on a low base of 7.5%. Given the competitive intensity in such a key segment, improving/maintaining margins will be a challenge for the company. Personal products segment margins expanded by 130bps yoy to 26.3% while, EBIT margins in the beverages segment contracted by 120bps to 14.4%. Packaged foods segment reported a loss of Rs37mn during the quarter against profit of Rs46mn in Q4 FY11.

Healthy revenue growth coupled with improved operating efficiency fuels net profit growth
Net profit for the quarter recorded strong 35.6% yoy growth at Rs6.6bn - marginally below our expecations, led by strong topline growth and improved operating efficiency. Adjusted net profit after extraordinary income of Rs281mn increased by 20.6% yoy to Rs6.9bn.

Extraordinary items

Particulars	Q4 FY12	Q4 FY11
Profit from sale of properties	347	478
Loss on sale of stake in a subsidiary	(7)	0
Provision for retirement benefits	(58)	390
Restructuring costs	(7)	(18)
Write back of provision against advance to a wholly owned subsidiary	67	0
Loss on capital reduction of a wholly owned subsidiary	(61)	0
Provision for expenses related to buyback of shares	0	(14)
Total	281	836

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 78%+ 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 margins. At the current market price of Rs416, the stock is trading at 27.4x FY14E EPS of Rs15.2. Maintain Market Performer rating with a revised 9-mth price target of Rs425 (earlier Rs393).

Financial summary

Y/e 31 Mar (Rs m)	FY11	FY12E	FY13E	FY14E
Revenues	193,810	217,356	244,296	276,053
yoy growth (%)	10.6	12.1	12.4	13.0
Operating profit	23,239	29,106	32,491	36,577
OPM (%)	12.0	13.4	13.3	13.3
Pre-exceptional PAT	20,992	25,725	29,045	32,827
Reported PAT	23,060	26,914	29,045	32,827
yoy growth (%)	4.7	16.7	7.9	13.0
EPS (Rs)	9.7	11.9	13.4	15.2
P/E (x)	42.8	35.0	31.0	27.4
Price/Book (x)	33.8	25.6	21.0	17.4
EV/EBITDA (x)	38.0	30.3	27.0	24.0
Debt/Equity (x)	0.0	0.0	0.0	0.0
RoE (%)	80.1	83.4	74.6	69.5
RoCE (%)	100.3	108.6	97.1	90.5

Source: Company, India Infoline Research