Hindustan Unilever's Q3FY20 results (Outperformer) - Superior execution in tough environment…

Q3FY20 result highlights

• Revenue grew by 2.6% yoy to Rs98.1bn (est: Rs99.9bn). EBITDA (including other op income) grew by 19.5% yoy to Rs24.5bn (est: Rs23.6bn), adjusting for benefits accruing from IndAS 116, comparable EBITDA grew by strong 14% yoy to Rs23.3bn and Adjusted PAT grew by 20.7% yoy to Rs16.9bn (est: Rs16.3bn).
• Domestic consumer business sales were up 3.6% yoy with a UVG of 5% (est: 4%). Home care grew by strong 9.8% led by both fabric and household. Beauty & Personal care fell by 2.8% yoy on account of decline in soaps (both volume fall and price cuts) and delayed winter impacted skin care. Foods & Refreshments posted robust 7.9% growth which was broad based across tea, coffee, ice creams and foods.
• Home care EBIT grew by strong 41% yoy with margin expansion of 400bps yoy, Personal care EBIT grew by 7.5% yoy with margin expansion of 270bps yoy and Food & Refreshment EBIT grew by 28% with EBIT margin expansion of 280bps.
• Gross margin was up 40bps yoy (-30bps qoq) on benign input cost and better mix. Ad spends fell by 2% yoy, staff cost fell 2.4% yoy and adj for IndAS 116 other expenses fell by ~6% yoy. Reported EBITDA margins were up 350bps yoy to 24.9%. Adjusting for IndAS 116 benefits, comparable margin improved by 210bp yoy.
• Market growth continues to be challenging with Rural continuing to grow at 0.5x that of Urban and HUL’s growth is led by market-share gains.

Key positives: Steady vol. growth, margin expansion.

Key negatives: Beauty & Personal Care portfolio rev. decline.

Impact on financials: Reduce EPS for FY20/21/22E by 2.6%/3.6%/4.6%.

Valuations & view

Despite challenging scenario, HUL delivered a strong Q3FY20 earnings print helped by steady volume growth, though value growth was below est., as well as tight cost control. The management commentary remains cautious but it expects to post competitive growth. HUL’s execution, even at its large revenue scale vs peers, remains spotless and is a testament to the strength of its brands, distribution, consumer understanding and its people capabilities; which we believe, will drive share gains and help achieve ahead of industry growth. GSK acquisition will add to the overall foods portfolio making its dependence on HPC come down further. Given the market context, HUL’s consistent delivery is commendable & justifies premium valuations. We roll forward to FY22E, maintain OP with revised TP of Rs2,324 (50x FY22E EPS).