Hindustan Unilever's Q2FY20 results (Outperformer) - Outperforming industry growth in tough macro…

Q2FY20 result highlights

• Revenue grew by 6.7% yoy to Rs98.5bn (est: Rs96.9bn). EBITDA (including other op income) grew by 21% yoy to Rs24.4bn (est: Rs23.8bn), adjusting for benefits accruing from IndAS 116, comparable EBITDA grew by strong 16% yoy to Rs23.4bn and Adjusted PAT grew by 20% yoy to Rs18.3bn (est:Rs19.3bn).
• Domestic consumer business sales were up 7% yoy with a UVG of 5% (est: 4%). Home care/Personal care/Foods sales grew by 9.4%/5.3% /8.4% yoy. Home care EBIT grew by 21% yoy with margin expansion of 170bps yoy, Personal care EBIT increased by 18% yoy with a margin expansion of 310bps yoy and Food & Refreshment EBIT grew by 2% with EBIT margin decline of 100bps.
• Gross margin was up 250bps yoy (+50bps qoq) on better mix and benign input cost. Adspends was up 8% yoy (up 20bps yoy as % of sales), staff cost fell 2% yoy and other expenses were up 4.9% yoy.
• Reported EBITDA margins were up 290bps yoy to 24.8%. Adjusting for IndAS 116 benefits, comparable margin improved by 200bp yoy.
• Market growth has decelerated further and Rural is now growing at 0.5x that of Urban (vs 1x in Q1FY20) and HUL’s growth is led by market-share gains.

Key positives: Healthy gross margin expansion.

Key negatives: Sharp deceleration in Rural growth.

Impact on financials: Reduce revenue estimates for FY20/21E by 1.5%/1.3%, EPS estimates increase by 7%/8.5% due to lower tax rate.

Valuations & view

Despite challenging scenario, HUL delivered a strong Q2FY20 earnings print helped by better than expected volume growth as well as gross margins. The management commentary remained cautious especially with sharper deceleration seen in the rural markets. However, HUL will continue to leverage its strength in terms of portfolio, pricing and supply chain infrastructure which we believe, will drive share gains and help achieve ahead of industry growth. We are building in some pick up in underlying demand in 2HFY20E and are baking in 6%/8% volume growth for FY20E/21E resulting in PBT CAGR of 24% (EPS CAGR of 28%), including tax cut benefits in FY20E and GSK acquisition benefit in FY21E, over the same period. Given the market context & its size, HUL’s consistent delivery is commendable & justifies premium valuations (47x FY21E). We roll forward to Sep 20 earnings and maintain outperformer with revised TP of Rs2,236.