Event update: Hindustan Unilever (Outperformer) - Thought leader, execution trailblazer...

We attended Hindustan Unilever Ltd’s (HUL) annual analyst meet and came out impressed with their consistent messaging and hawk-eye focus on execution. Management reiterated its strategy of strengthening the core portfolio (contributes 40-45% of the business), creating categories of the future (~20% of business, growing 2x of company average) and continue to drive premiumisation (over indexed to the extent of 1.3x versus market). This is backed by a holistic cost saving program (savings > than 7% of turnover) and brilliant execution (faster speed to market, higher coverage & assortment and focus on channels of the future) enabled by distinctive cluster level strategy and one of the best talent pools. Our belief that HUL is far ahead of peers was reestablished and given its impeccable growth engine, it should outperform peers in terms of growth, especially during the ensuing slowdown (just as it did during demonetization and GST implementation). We maintain our OP rating with a price target of Rs1935 (49x FY21E EPS).

Leveraging technology and data to be a future fit organization: Under the ‘Re-Imagining HUL’ initiative, it is undertaking an end-to-end organization change program across functions with technology and data being the bedrock. This includes picking up consumer feedback real-time, driving precision marketing on distinctive cohorts and traits, capturing demand through connected stores (Shikhar app/Humarashop program) and changing mindset from that of service to fulfillment (with the help of project Samadhan, Namati, Pantry, Mitra, Jarvis). The importance of this program is underpinned by the fact that the digital transformation council has representation from all functions and is headed by the CMD himself.

Cost focus to provide fuel for market development & drive profitable growth: Despite exiting FY19 at an all-time high EBITDA margin (of 22.6%), management is confident of improving margins in FY20E albeit the delta would be lower than what has been experiences in the past many years. Through its end to end cost focus, company will continue to unlock value and use the same for market development, built capabilities and ensure consistent profitable growth. Ind-AS 116 implementation will lead to improvement in EBITDA margin offset by an increase in finance expenses, making it a PBT neutral exercise.

GSK acquisition update: Management does not believe that HFD penetration in India has peaked (currently stands at 25%) and with HUL’s strong rural distribution and expertise in the sachet format, it remains confident of making inroads in rural markets and further scale up these brands. Margin improvement guidance of 1,000bps stays on track and acquisition is expected to be completed before the end of this fiscal.