Hindustan Unilever Ltd (Q3 FY13)

Operating margins contracted by 120bps to 13.5% mainly due to sharp 100bps/60bps increase in adspend and staff cost.

Jan 23, 2013 05:01 IST India Infoline News Service

CMP Rs482, Target Rs513, Upside 6.6% 
  • Q3 revenues were below our expectations at ~Rs64bn, up by mere 10% yoy led by ~15% yoy growth in HPC segment. Domestic FMCG business witnessed a lower underlying volume growth of 5% against 7% in Q2 FY13 
  • Personal products segment witnessed 140bps expansion in EBIT margins at 28.3%. Soaps and Detergents segment margins, however, contracted by 100bps to 12.4%
  • Operating margins contracted by 120bps to 13.5% due to sharp rise in advertising cost. Adjusted net profit registered ~16% yoy increase at Rs8.7bn driven by higher other income
  • As per the new royalty agreement with Unilever, royalty payment will  increase from current 1.4% of turnover to 3.15% in a phased manner effective February, 2013 till March 2018
  • We maintain Market Performer rating with a revised 9-mth target price of Rs513 (earlier Rs544)

Result table (Standalone)

(Rs m) Q3 FY13 Q3 FY12 % yoy Q2 FY13 % qoq
Net sales 64,337 58,443 10.1 61,554 4.5
Material cost (34,191) (30,799) 11.0 (32,695) 4.6
Personnel cost (3,427) (2,741) 25.0 (3,305) 3.7
Advertising cost (8,222) (6,902) 19.1 (7,690) 6.9
Other overheads (9,821) (9,408) 4.4 (9,652) 1.8
Operating profit 8,677 8,593 1.0 8,213 5.6
OPM (%) 13.5 14.7 (122) bps 13.3 14 bps
Depreciation (593) (568) 4.3 (577) 2.8
Interest (75) (5) 1,573.3 (63) 19.0
Other income 3,549 1,913 85.5 3,042 16.7
PBT 11,557 9,933 16.3 10,615 8.9
Tax (2,771) (2,271) 22.0 (2,561) 8.2
Effective tax rate (%) 24.0 22.9 - 24.1 -
Adjusted PAT 8,786 7,662 14.7 8,053 9.1
Adj. PAT margin (%) 13.7 13.1 55 bps 13.1 57 bps
Extra ordinary items (73) (124) (41.2) 16 -
Reported PAT 8,714 7,538 15.6 8,069 8.0
Ann. EPS (Rs) 16.3 14.2 14.6 14.9 9.1
Source: Company, India Infoline Research

Revenues below expectations
HUL Q3 FY13 revenues were below our expectations (of ~Rs66bn) at Rs64.3bn – up by mere 10.1% yoy due to slower 15% yoy growth in domestic FMCG business. Underlying volume growth was lower at 5% yoy compared to 7% in Q2 FY13 and 9.1% in Q3 FY12, due to price hikes in sachets, slowdown in ‘Wheel’, weakness in discretionary categories and lower modern retail sales.

Revenue break-up
(Rs m) Q3 FY13 Q3 FY12 Growth Q2 FY13 Growth
  (3) (3) % yoy (3) % qoq
Domestic FMCG - HPC 50,708 43,963 15.3 48,131 5.4
Domestic FMCG - Foods 10,877 9,640 12.8 10,626 2.4
a) Domestic FMCG - Total 61,585 53,604 14.9 58,758 4.8
b) Others 2,752 4,840 (43.1) 2,796 (1.6)
Total (a+b) 64,337 58,443 10.1 61,554 4.5
Source: Company, India Infoline Research

The core Soaps and Detergents segment; contributing ~48% to revenues and ~36% to EBIT registered 19.8% yoy growth at Rs31.7bn (double digit volume growth in Surf and Rin). Personal products segment recorded 13% yoy growth in revenues at Rs20.5bn primarily led by strong growth in skin care segment (double digit growth in brands - Ponds, Vaseline, Dove). The management stated that the skin care category is witnessing a slowdown. We believe price hikes taken in Fair and Lovely (by Re1 to Rs8 taken during Q2 FY13) and Dove sachets will take more 3-4 months to be successfully absorbed by the market. The growth could have been better but for the slower growth in shampoo segment due to intense competition. Beverages segment registered 18.2% yoy growth in revenues led by premium tea and coffee (strongest quarter for tea). Revenues from the packaged foods segment witnessed slower 7.7% yoy increase at Rs3.3bn driven by Kissan (double digit growth in Knorr on a low base – market still witnessing slowdown).

Segment-wise revenue trend
Segments FY11 FY12 FY13
(Rs m) Q1 Q2

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