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Hindustan Unilever's Q3FY18 results (Outperformer) - Sharp revenue beat... growth levers in place!

Q3FY18 result highlights

• Hindustan Unilever’s (HUL) revenues increased by 11% yoy at Rs83bn, EBITDA increased by 22% yoy at Rs14.1bn (est: Rs15bn) and Adjusted PAT increased by 30% yoy at Rs12bn (est:Rs11.7bn)
• Adjusting for the accounting impact of GST, comparable domestic consumer business sales were up 17% yoy with a volume growth of 11% (est: 8%) for the quarter, led by double digit growth across segments.
• On comparable basis, revenues for Home and Personal Care increased by 20% and 17% yoy. While Foods & refreshment categories sales grew by 18% and 13% yoy respectively.
• Reported gross margins improved 290bps yoy. Despite increase in advertising spends by 25% yoy (up 150 bps to 13.3% of sales), benefit of operating leverage and higher other operating income resulted in operational EBITDA increasing by 24% yoy with margin expansion of 200bps. On comparable basis, margins were up by 110bps yoy.
• Tax outgo declined by 20% due to reversal of tax provisions, depreciation increased by 21% yoy and Other income increased by 84% yoy(dividend from subsidiary) resulting in PAT growth of 30%.

Key positives: Strong domestic volume growth.

Key negatives: Weakness in food and refreshments margins.

Impact on financials: Factoring higher volume growth, we have increased our FY19/20E earnings estimate by 2%/3%.

Valuations & view

Highest quarterly growth in over 6 years, highest ever Q3 EBITDA margins, highest EBIT growth in home care since its segmentation are a few of the headline features of the quarter’s results for HUL. We believe that with volume benefits accruing from GST led price cuts, rural demand recovery and continued strengthening naturals presence, HUL is well placed to deliver high single digit volume growth over the next 18-24 months. Further, with benefits from lower costs and evident operating leverage, gradual EBITDA margin improvement from current levels is also likely. Though valuations at 42x FY20E earnings are at a 15% premium to its FMCG peer average, we believe HUL’s earnings CAGR of 18% over FY17-20E (highest normalized earnings growth in our FMCG coverage universe) more than justifies this premium. We maintain Outperformer rating on the stock.