Hindustan Unilever's Q1FY20 results (Outperformer) - Efficiently navigating the challenging times

Q1FY20 result highlights

• Revenue grew by 6.6% yoy to Rs101.1bn (est: Rs102.5bn). EBITDA (including other op income) grew by 17.6% yoy to Rs26.5bn (est: Rs25bn), adjusting for benefits accruing from IndAS 116, comparable EBITDA grew by healthy 13.4% yoy to Rs25.5bn and Adjusted PAT grew by 11.7% yoy to Rs17.5bn (est:Rs17.3bn).
• Domestic consumer business sales were up 7% yoy with a UVG of 5% (est: 6%). Home care/Personal care/Foods sales grew by 10.1%/4.1% /9.2% yoy. Home care EBIT grew by 17.7% yoy with margin improvement of 130bps yoy, Personal care EBIT increased by 12.8% yoy with a margin expansion of 230bps yoy and Food & Refreshment EBIT grew by 15.5% with EBIT margin improvement of 110bps. We note that EBIT is comparable yoy as IndAS 116 impact gets largely neutralised at EBIT level.
• Gross margins was flat yoy (up 170bps qoq) on benign input cost environment. Adspends was up just 0.7% yoy (down 70bps yoy as % of sales), staff cost was up 2.3% yoy and other expenses fell by 5.6% yoy. Reported EBITDA grew by 17.6% yoy with a margin expansion of 240bps yoy to 26.2%. Adjusting for IndAS 116 benefits, comparable margin improved by 150bp yoy.

Key positives: Strong comparable margin expansion.

Key negatives: Moderation in Personal wash segment.

Impact on financials: Reduce FY20E/21E estimates by 1.5%/1.0%.

Valuations & view

HUL’s Q1FY20 earnings print was broadly in line helped by sharp margin improvement. It expects near-term demand to remain subdued given macro-economic conditions; however, it has not seen any sharp deceleration in demand trends in the month of June versus that reported for the entire Q1FY20; HUL is hopeful of demand recovering from H2FY20E onwards. Undeterred by this near-term outlook, HUL continues to invest heavily in terms of new product launches, improving price-value equation for consumers in some segments and will plough back savings from benign input cost environment in A&P. We believe this would ensure that HUL is one of the biggest beneficiaries, whenever underlying demand pick-ups even as HUL comes good on its ‘moderate’ margin improvement guidance. We are factoring in 7%/8% volume growth for FY20E/21E and bake in earnings CAGR of 18% over the same period and value HUL based on our FY21E earnings (including GSK Consumer). Maintain Outperformer.