Hindustan Unilever's Q2FY18 results (Outperformer) - Margin outperformance continues!!!
Q2FY18 result highlights
- Hindustan Unilever’s (HUL) revenues (net of excise) increased by 6.5% yoy at Rs82bn, EBITDA increased by 25% yoy at Rs15.7bn (est: Rs15.3bn) and Adj PAT increased by 14.2% yoy at Rs12.4bn (est:Rs12.4bn)
- Adjusting for the accounting impact of GST, comparable domestic consumer business sales were up 10% yoy with a volume growth of 4% for the quarter.
- On comparable basis, revenues for Home and Personal Care increased by 13% and 8% yoy. While Foods & refreshment categories sales grew by 11% and 10% yoy respectively.
- Reported gross margins improved 360bps yoy. In spite of increase in A&P spends by 20% yoy (up 140 bps to 12.5% of sales), operational EBITDA increased by 19.7% yoy with margin expansion of 230bps to 20.2%. Adjusting for accounting impact, comparable margins were up by 180bps yoy.
- Tax rate was lower by 130bps to 29.2% and depreciation increased by 22% led by ramp up in Assam unit. Other income declined by 21% yoy impacting PAT growth.
Key positives: Recovery in volumes. Continued strong margin expansion
Key negatives: Uptick in input costs. Decline in personal care EBIT margins
Impact on financials: No change in earnings estimates
Valuations & view
HUL continues to deliver on its gradual volume improvement and strong margin outperformance trajectory. Drivers to improve profitability are well in place; we believe an uptick in volume growth in the quarters to follow (led by normalized on ground situation, rural pickup and new launches) will further accelerate our operating leverage profit growth thesis for the company. Though valuations at 40x FY20E earnings are at a 15% premium to its FMCG peer average, we believe HUL’s earnings CAGR of 17% over FY17-20E (highest normalized earnings growth in our FMCG coverage universe) more than justifies this premium. We maintain Outperformer; HUL is our top large cap FMCG pick.
Hindustan Unilever is predominantly engaged in manufacturing and distributing consumer products mainly in India. Co. operates five main business segments: Soaps and Detergents include soaps, detergent bars, detergent powders, detergent liquids, scourers, etc.; Personal Products include products in the categories of Oral Care, Skin Care (excluding soaps), Hair Care, Deodorants,Talcum Powder, Colour Cosmetics, Ayush services; Beverages include tea and coffee; Package Foods include Branded Staples (Atta, Salt, Bread, etc.), Culinary Products (tomato based products, fruit based products, soups, etc.) and Frozen desserts; Others include Exports, Chemicals, Water business, Infant Care Products.
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