Hindustan Unilever (Q1 FY15)

• HUL registered healthy ~13% yoy revenue growth at Rs75.7bn, above our expectations at Rs73.2bn. Underlying volume growth stood at ~6% yoy above our expectations

• HPC segment registered strong ~13% yoy growth driven by healthy 13%/15% yoy growth in Soaps and Detergent/Personal products segment. EBIT margins in both Soaps and Detergents/Personal products (on a low base) segments expanded by 90bps/280bps respectively

• OPM expanded by 120bps to 17.4%, aided by lower staff and advertising cost. PAT increased by 11.4% yoy to Rs10.2bn above our expectations of Rs9.4bn led by improved operating efficiency and higher other income. APAT post extraordinary items of Rs396mn increased by ~4% yoy to Rs10.6bn

• Recommend Accumulate with revised 9-mth target price of Rs700

Healthy growth in HPC segment drives topline growth

HUL reported healthy 13.2% yoy revenue growth at Rs75.7bn in Q1 FY15 above our expectations of Rs73.2bn driven by strong 13% yoy growth in HPC segment. Underlying volume growth for the quarter stood at 6% yoy against 5% yoy in Q1 FY14 (3% in Q4 FY14).

Revenue break-up

Source: Company, India Infoline Research

The core S&D segment; contributing ~50% to revenues and ~40% to EBIT registered strong ~13% yoy growth at Rs38.5bn (double digit volume growth in Dove, Pears, Lux, Hamam, Lifebuoy and laundry brands Surf, Rin). Personal products segment too recorded healthy 14.7% yoy revenue growth at Rs21.6bn driven by double digit growth in skin care segment (Fair & Lovely, Ponds and Lakme (led by premium make up)). Hair care segment registered sustained double digit volume growth led by healthy growth in Dove, Clinic Plus and TRESemmé (close to become Rs1bn brand within one year of launch). In the oral care segment, Close Up brand continues to grow however Pepsodent is yet to recover from the high promotional intensity in the market. Beverages segment registered 10.5% yoy growth led by double digit growth in tea and coffee. Packaged foods segment registered strong 18.8% yoy growth at Rs5.4bn driven by Kissan, Knorr, Kwality Walls and Magnum.

Segment-wise revenue trend

Source: Company, India Infoline Research

Segment-wise EBIT trend

Source: Company, India Infoline Research

Lower staff and advertising cost fuel operating margins by 120bps

Operating margins expanded by 120bps to 17.4% led by 60bps/40bps decline in advertising cost as percentage of sales. The expansion could have been even higher but for sharp 240bps increase in raw material cost (sharp increase in key input prices like PFAD, Brent crude). We believe competitive intensity in the key categories (like soaps, detergents, shampoos and oral care) will compel HUL to increase adspend in the coming quarters, which will keep margins under check.

Soaps and Detergents segment witnessed healthy 90bps expansion in EBIT margins at 13.8% while Personal product segment margins expanded by 280bps to 27.6% on a low base. Packaged foods segments witnessed strong 250bps expansion in margins at 10.9% (highest ever). This segment reported 53.8% yoy increase in profit at Rs591mn against Rs384 reported in Q1 FY14. Beverages segment margins however contracted by 200bps to 16.3%.

Net profit surpassed our expectations of Rs9.4bn by recording 11.4% yoy growth at Rs10.2bn driven by healthy topline growth and higher other income. The management expect effective tax rate to increase by 250-300bps for FY15. Adjusted net profit after exceptional items of Rs396mn increased by 3.7% yoy to Rs10.6bn.

To witness ~13% earnings CAGR over FY14-16E; recommend Accumulate

HUL has identified 13 new segments like handwash, body wash, face wash, tea bags, soups, fabric conditioners, hair conditioners etc as segments of the future. Currently these are in investment phase but are growing at 2x-3x the company’ growth rate. HUL is also investing in the channel of tomorrow i.e. organized retail, whose contribution to sales is already 15% and is expected to grow to 25% over the next several years.

Going ahead, we believe requirement of higher adspend on account of severe competition in core categories, currency depreciation and firm input prices could put pressure on operating margins. In a slowing macroeconomic environment it will be difficult for HUL to take price hikes (as demand remains weak). We expect HUL to witness revenue / earnings CAGR of ~13% respectively over FY14-16. At the current market price of Rs686, the stock is trading at 31.9x FY16E EPS of Rs21.5. Recommend Accumulate with a revised 9-mth target price of Rs700 (earlier Rs601).