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HUL
1. 1QFY2011 Result Update | FMCG
July 28, 2010
HUL REDUCE
CMP Rs252
Performance Highlights Target Price Rs237
(Rs cr) 1QFY11 1QFY10 % yoy Angel Est % Diff Investment Period 12 months
Revenue 4,793.9 4,475.7 7.1 4,732.6 1.3
EBITDA 598.6 688.1 (13.0) 674.4 (11.2) Stock Info
OPM (%) 12.5 15.4 (289bp) 14.3 (176bp) Sector FMCG
PAT 514.7 536.7 (4.1) 562.7 (8.5) Market Cap (Rs cr) 55,850
Source: Company, Angel Research Beta 0.5
52 Week High / Low 306/218
HUL posted disappointing set of numbers for 1QFY2011, below our expectations
on the profitability front. While top-line growth was marginally above estimates, Avg. Daily Volume 357,554
driven by 11% volume growth, recurring earnings declined 4% yoy led by Face Value (Rs) 1.0
significant margin contraction due to 34% rise in ad-spends (on account of higher
competitive intensity in categories like detergents, soaps and shampoos). Other BSE Sensex 17,957
key highlights of the results include: 1) 2.4% yoy revenue growth in soaps and Nifty 5,398
detergents (S&D) segment, 2) EBIT margin contracted 626bp yoy, and 3) double-
Reuters Code HLL.BO
digit volume growth in detergents and personal products. We maintain Reduce on
the stock. Bloomberg Code HLVR@IN
Modest top line growth, higher ad-spends contract margins: For 1QFY2011, HUL
posted top-line growth of 7.1% yoy to Rs4,794cr (Rs4,476cr) largely driven by Shareholding Pattern (%)
volume growth of 11% (low base of 2% growth yoy). However, negative value
growth of ~4% (due to price cuts/promotional offers largely in detergents Promoters 52.0
category) dragged top-line growth. Overall FMCG sales grew 6.7% with a 5.2% MF /Banks /Indian FIs 16.2
growth in HPC and 13.4% growth in foods business. In terms of earnings, HUL
FII /NRIs /OCBs 16.5
posted 2% yoy decline to Rs533cr (Rs543cr) on a reported basis and 4% decline
to Rs515cr (Rs537cr) on a recurring basis, despite the 106% yoy spike in other Indian Public /Others 15.3
income to Rs124cr (Rs60cr), owing to weak top-line growth and significant
margin contraction by 289bp yoy, as ad-spend surged 34% yoy. Tax rate
remained stable at ~23% and interest costs reduced to almost nil.
Abs. (%) 3m 1yr 3yr
Outlook and Valuation: At the CMP of Rs252, the stock is trading at 22.5x Sensex 3.3 17.1 17.9
FY2012E earnings. We maintain a Reduce on the stock, with a Target Price of HUL 4.2 (8.9) 28.5
Rs237 (based on 21x FY2012E EPS) owing to weak earnings growth vis-à-vis the
FMCG sector, uncertain earnings environment and significantly higher
competitive intensity.
Key Financials
Y/E March (Rs cr) FY2009# FY2010 FY2011E FY2012E
Net Sales 20,239 17,524 19,343 21,515
% chg 48.0 (13.4) 10.4 11.2
Net Profit (Adj) 2,501 2,103 2,159 2,449
% chg 47.2 (15.9) 2.7 13.5
EBITDA (%) 13.1 14.5 13.2 13.6
EPS (Rs) 11.5 9.6 9.9 11.2
P/E (x) 22.0 25.0 25.5 22.5 Anand Shah
P/BV (x) 26.7 21.3 18.6 16.4 022-4040 3800-334
RoE (%) 121.3 81.4 73.0 72.8 anand.shah@angeltrade.com
RoCE (%) 110.4 101.3 86.6 86.5
Chitrangda Kapur
EV/Sales (x) 2.6 3.0 2.7 2.4
022-4040 3800-323
EV/EBITDA (x) 20.1 20.3 20.1 17.4
chitrangdar.kapur@angeltrade.com
Source: Company, Angel Research; #Note: FY2009 Results are for 15 Months
Please refer to important disclosures at the end of this report 1
2. HUL | 1QFY2011 Result Update
Exhibit 1: Quarterly performance
Y/E March (Rs cr) 1QFY11 1QFY10 % yoy FY2010 FY2009# % chg
Net Sales 4,793.9 4,475.7 7.1 17,523.8 20,239.3 (13.4)
Consumption of RM 2,446.6 2,311.7 5.8 8,877.9 10,810.0 (17.9)
(% of Sales) 51.0 51.6 50.7 53.4
Staff Costs 250.6 250.4 0.1 936.3 1,152.1 (18.7)
(% of Sales) 5.2 5.6 5.3 5.7
Advertising Expense 751.2 561.1 33.9 2,391.4 2,130.9 12.2
(% of Sales) 15.7 12.5 13.6 10.5
Other Expenses 746.9 664.4 12.4 2,769.7 3,490.2 (20.6)
(% of Sales) 15.6 14.8 15.8 17.2
Total Expenditure 4,195.3 3,787.6 10.8 14,975.4 17,583.3 (14.8)
Operating Profit 598.6 688.1 (13.0) 2,548.4 2,656.0 (4.1)
OPM (%) 12.5 15.4 14.5 13.1
Interest 0.1 5.2 (98.5) 7.0 25.3 (72.4)
Depreciation 53.5 42.5 25.9 184.0 195.3 (5.8)
Other Income 124.5 60.5 105.7 349.6 589.7 (40.7)
PBT (excl. Extr. Items) 669.5 700.9 (4.5) 2,707.1 3,025.1 (10.5)
Extr. Income/(Expense) 18.5 6.5 111.3 (25.1)
PBT (incl. Extr. Items) 688.0 707.4 (2.7) 2,818.4 3,000.0 (6.1)
(% of Sales) 14.4 15.8 16.1 14.8
Provision for Taxation 154.8 164.3 (5.8) 616.4 503.6 22.4
(% of PBT) 23.1 23.4 22.8 16.6
Recurring PAT 514.7 536.7 (4.1) 2,090.7 2,521.6 (17.1)
PATM (%) 10.7 12.0 11.9 12.5
Reported PAT 533.2 543.2 (1.8) 2,202.0 2,496.5 (11.8)
Equity shares (cr) 218.2 218.1 218.2 218.1
Adjusted EPS (Rs) 2.4 2.5 10.1 11.4
Source: Company, Angel Research; Note: #FY2009results are for 15months and not comparable
Top-line growth above estimates, volume growth sustained at 11%
For 1QFY2011, HUL posted top-line growth of 7.1% yoy to Rs4,794cr (Rs4,476cr)
largely driven by volume growth of 11% (low base of 2% growth yoy). However,
negative value of growth of ~4% (due to price cuts/promotional offers largely in
detergents category) dragged top-line growth. Overall FMCG sales grew 6.7% with a
5.2% growth in HPC and 13.4% growth in foods Business. In HPC, soaps &
detergents (S&D) segment posted muted growth of 2.4% yoy due to price cuts and
intense competition in detergents category.
Management has indicated that detergents (all three brands grew well) registered
double-digit volume growth and soaps regained volume momentum post portfolio
rejuvenation with premium soaps portfolio growing by strong double digits. Personal
products registered 11.4% yoy growth largely driven by double-digit volume growth.
In foods business, all segments grew well contributing to growth (beverages grew 8%
yoy, processed foods grew 23% yoy and ice creams grew 18% yoy).
July 28, 2010 2
3. HUL | 1QFY2011 Result Update
Exhibit 2: Sixth qtr of single digit top-line growth Exhibit 3: Price cuts/low base boost volume growth
12 11 11
6,000 25.0
10 8
5,000 8 7
20.0 5
6
4,000
15.0 4 2 2
(%)
(%)
(Rs cr)
2 1
3,000
10.0 -
2,000 (2)
1,000 5.0 (4)
(6) (4)
- -
2QFY09
3QFY09
4QFY09
5QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY09 4QFY09 1QFY10 3QFY10 1QFY11
Top-line (LHS) YoY growth (RHS)
Source: Company, Angel Research Source: Company, Angel Research
Recurring earnings declines 4% yoy despite 106% jump in other income
Earnings fell 2% yoy to Rs533cr (Rs543cr) on a reported basis and 4% to Rs515cr
(Rs537cr) on a recurring basis, despite the 106% yoy spike in other income to
Rs124cr (Rs60cr), owing to weak top-line growth and significant margin contraction.
Tax rates remained stable at ~23% and interest costs reduced to almost nil.
Significant spike in ad-spend leads to margin contraction by 289bp
At the operating level, HUL posted a weak performance, despite the fall in input costs
(down 61bp yoy, impressive given the price cuts undertaken this quarter) and savings
in staff costs (down 37bp yoy) largely due to higher overheads (up 73bp) and
significant jump in advertising spends (up 34% yoy in absolute terms, 313bp yoy)
due to intense competitive pressures (detergents, soaps and shampoos witnessing
higher competitive intensity). Hence, operating margin for the quarter contracted by
289bp yoy to 12.5% (15.4%) resulting in 13% yoy decline in EBITDA at Rs599cr
(Rs688cr).
In terms of categories, S&D segment witnessed sharp margin contraction by 626bp
yoy impacted by the price cuts and higher ad spends. Personal products registered a
margin expansion of 279bp yoy, while processed foods registered positive EBIT
margin of 5%.
Exhibit 4: Earnings in red for second quarter Exhibit 5: Spike in ad-spend continues, OPM dips
710 40.0 60.0 50.9 48.6 49.0
610 30.0 46.9 45.8 46.1 47.8 48.4 49.1
50.0
510 20.0
40.0
410 10.0
(Rs cr)
30.0
(yoy %)
(%)
310 - 16.1 16.0
20.0 13.3 11.8 13.2 15.4 14.4 12.3 12.5
210 (10.0)
10.0
110 (20.0)
10 (30.0) -
2QFY09 4QFY09 1QFY10 3QFY10 1QFY11 2QFY09 4QFY09 1QFY10 3QFY10 1QFY11
PAT (LHS) YoY growth (RHS) OPM Gross Margin
Source: Company, Angel Research Source: Company, Angel Research
July 28, 2010 3
4. HUL | 1QFY2011 Result Update
Exhibit 6: Segment-wise Performance
Y/E March (Rs cr) 1QFY11 1QFY10 % chg FY2010 FY2009# % chg
Soaps and Detergents 2,264 2,212 2.4 8,266 9,885 (16.4)
Personal Product 1,366 1,226 11.4 5,048 5,385 (6.3)
Beverages 538 500 7.7 2,142 2,300 (6.8)
Processed Foods 211 172 22.7 731 808 (9.6)
Ice Creams 105 89 18.1 231 235 (1.8)
Exports 265 257 2.8 1,005 1,576 (36.2)
Others 113 79 41.8 347 359 (3.3)
Less:Inter Segment Revenue - (4) (4) (8)
Total Gross Income 4,861 4,530 7.3 17,766 20,539 (51.4)
Soaps and Detergents 249 381 (34.8) 1,185 1,482 (20.0)
Personal Products 339 270 25.5 1,297 1,429 (9.3)
Beverages 70 70 (1.1) 320 308 3.8
Processed Foods 10.6 (1.3) 4 1 206.2
Ice Creams 15 15 (1.0) 13 9 47.2
Exports 23 21 10.5 59 108 (45.9)
Others (27) (28) (72) (134)
Total PBIT 679 728 (6.8) 2,805 3,203 (12.4)
Less: Interest Exp. (0) (5) (7) (25)
Less: Other Unallocable Exp 9 (20) (36) (169)
PBT 688 704 (2.2) 2,763 3,009 (8.2)
PBIT Margin (%)
Soap and Detergent 11.0 17.2 14.3 15.0
Personal Product 24.8 22.0 25.7 26.5
Beverages 12.9 14.1 14.9 13.4
Processed Foods 5.0 (0.7) 0.6 0.2
Ice Creams 14.6 17.5 5.5 3.7
Exports 8.6 8.0 5.8 6.9
Others (23.6) (35.2) (20.8) (37.5)
Source: Company, Angel Research; Note: #FY2009results are for 15months and not comparable
S&D sales beat estimates aided by strong volume growth
HUL’s S&D segment witnessed 2% yoy growth, above our estimates of 3% decline,
led by double-digit volume growth. However, overall growth was curtailed to single
digits owing to the steep price cuts in the detergents segment due to price war with
P&G. In detergents, Wheel delivered double-digit volume growth, while Rin sustained
strong volume growth post its re-launch. Soaps recorded steady performance led by
premium portfolio (grew ahead of market, Dove is now accessible to more customers
at Rs20 price point). However, PBIT margins in the segment collapsed by 626bp yoy
impacted by the steep price cuts and higher ad-spend.
We believe HUL’s core category of S&D will continue to remain under pressure in the
near-to-medium term until competitive pressures reduce. We expect the S&D
segment to post 4% growth in top-line in FY2011E, as growth in soaps and spike in
detergent volume due to the price cuts gets offset by negative value growth in
detergents. Moreover, we have modeled in around 200bp erosion in S&D segment
margins for FY2011E to factor in the impact of price cuts.
July 28, 2010 4
5. HUL | 1QFY2011 Result Update
Exhibit 7: S&D continues to post low growth Exhibit 8: EBIT margins dip to new lows of 11%
2,300 30.0 500 20.0
25.0
2,200 400
20.0 15.0
2,100 300
(%)
(%)
15.0
(Rs cr)
(Rs cr)
10.0
2,000 10.0 200
5.0 5.0
1,900 100
-
1,800 (5.0) - -
2QFY09 4QFY09 1QFY10 3QFY10 1QFY11 2QFY09 4QFY09 1QFY10 3QFY10 1QFY11
Top-line (LHS) YoY growth (RHS) EBIT (LHS) EBIT % (RHS)
Source: Company, Angel Research Source: Company, Angel Research
PP sales below estimates, double-digit volume growth continues
The personal products (PP) segment registered 11.4% yoy growth, ~3% below our
estimates on account of lower sales in shampoos (higher competitive pressures).
However, in terms of profitability, the segment registered margin expansion of
280bp yoy, despite higher ad-spend on account of product mix gains and favourable
base.
Exhibit 9: PP growth slows down to 11% Exhibit 10: EBIT margins improve yoy and qoq
1,600 20.0 500 35.0
1,400 30.0
400
1,200 15.0 25.0
1,000 300
(%)
(%)
20.0
(Rs cr)
(Rs cr)
800 10.0
200 15.0
600
400 5.0 10.0
100
200 5.0
- - - -
2QFY09 4QFY09 1QFY10 3QFY10 1QFY11 2QFY09 4QFY09 1QFY10 3QFY10 1QFY11
Top-line (LHS) YoY growth (RHS) EBIT (LHS) EBIT % (RHS)
Source: Company, Angel Research Source: Company, Angel Research
Processed foods, ice creams do well, beverages disappoints
The foods segment recorded a growth of 13.4% yoy driven largely by strong growth
in processed foods (up 23% yoy) and ice creams (up 18% yoy). However, beverages
disappointed registering muted growth of 8% yoy as the tea market witnessed
slowdown. Processed foods grew in strong double digits with improved profitability
(EBIT margins expand 574bp yoy). All three core brands, Knorr (Knorr soupy noodles
accepted well), Kissan and Annapurna did well. The ice cream segment was led by
Impulse and Take Home categories.
July 28, 2010 5
6. HUL | 1QFY2011 Result Update
Investment Concerns
High competitive intensity across categories, ITC a major threat: During the last
several quarters, management has constantly admitted that competitive intensity
across key categories of soaps, detergents, shampoos and skin care has
increased and is likely to further intensify. While corrective steps taken by HUL
over the last several quarters in terms of correcting pricing, promotional activity
and strengthening distribution have helped stabilise market share losses, we
believe ITC’s commitment to categories like soaps, shampoos and skin care is a
major threat for HUL in the long run.
OPM to decline as re-investment in ad-spend to sustain: Over FY2010-12E, we
have modeled in 100bp reduction in OPM (130bp in FY2011E) despite
incremental gains from cost rationalisation measures and moderate decline in
gross margins, as we expect ad spend to rise to ~14.5-15% levels from current
13.6% (reflected in 1QFY2011 results) due to high competitive intensity. Hence,
we expect EBITDA to log a muted 7% CAGR over FY2010-12E
Rich valuations for subdued 8% CAGR unjustified: At the CMP of Rs253, HUL is
trading at rich valuations of 22.5x FY2012E earnings, which is unjustified given
the subdued 8% CAGR expected over FY2010-12E (~3x PEG) vis-à-vis sector
growth (ex-HUL) of ~15-18%. In terms of historical valuations, HUL is trading at
50% premium to the Sensex (in line with the 5-yr average) and ~5% discount of
5-yr average P/E leaving little room for upside.
Outlook and Valuation
Post another quarter of weak results on the operational front, we have revised our
earnings estimates downwards by ~1-2% modeling in lower OPMs on account of the
significant increase in ad spends.
Exhibit 11: Change in Estimates
Old Estimate New Estimate % chg
(Rs cr) FY11E FY12E FY11E FY12E FY11E FY12E
Revenue 19,305 21,530 19,343 21,515 0.2 (0.1)
OPM (%) 13.5 13.7 13.2 13.6 (30bp) (15bp)
EPS (Rs) 10.1 11.4 9.9 11.2 (2.1) (1.2)
Source: Company, Angel Research
We expect HUL to post 10.8% CAGR in top-line over FY2010-12E, despite the steep
price cuts largely aided by steady performance of its personal care and foods
divisions (aided by innovations and higher ad spends), spike in detergents volume
(due to price cuts) and modest performance of its soaps business (aided by brand
re-launches and select price cuts). In terms of earnings, we expect HUL to post weak
8% CAGR during the period impacted by the dip in margins (due to the price cuts)
and higher tax rate (on account of increase in MAT). However, further price cuts,
spillover of price war to other categories and poor response to brand re-launches,
promotions and price cuts carry downside risks to our estimates.
At the CMP of Rs252, the stock is trading at 22.5x FY2012E earnings. We maintain
Reduce on the stock with a Target Price of Rs237 (based on 21x FY2012E EPS) owing
to weak earnings growth vis-à-vis the FMCG sector, uncertain earnings environment
and significantly higher competitive intensity.
July 28, 2010 6
12. HUL | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement HUL
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 28, 2010 12