HUL’s Q2FY15 results were more or less in line with our estimates with lack of any positive surprises. Volume growth of 5% Y-o-Y was not very encouraging, though it was on expected lines.

1. RETAIL RESEARCH Oct Hindustan Unilever Ltd. (HUL) – Q2FY15 Result 30, 2014
HDFC sec Scrip code Industry CMP (Rs.) Recommended Action Entry price band (Rs.)* Target (Rs.) Time Horizon
HLLLTDEQNR FMCG 731.5 Buy on dips 673-694 747 1 quarter
*Applicable till the next results are announced
In our Q1FY15 Result Review dated Aug 05, 2014, we recommended investors to buy HUL on dips in the price band of Rs. 620-641 for a price target of Rs. 694 over the
next quarter. Thereafter, the stock touched a high of Rs. 771 on Sept 25, 2014 and a low of Rs.692.50 on Aug 12, 2014. Currently, it is quoting at Rs. 731.5.
Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods company, with leadership in Home & Personal Care Products. It is the market leader
across diverse FMCG categories and has powerful brands like Rin, Surf Excel, Lux, Lifebuoy, and Ponds in its portfolio.
HUL’s Q2FY15 results were more or less in line with our estimates. We present an update on the stock.
Q2FY15 Results Review
Y-o-Y
 Net sales grew by 10.6% Y-o-Y to Rs. 74.66 bn [Q2FY14: Rs. 67.47 bn]. The Domestic Consumer business grew at 10.4% with volume growth of 5% (in line with our
expectations). Home and Personal Care (HPC) reported growth of 10.7% Y-o-Y with personal products growing by 9.9% (which was disappointing) and Soaps &
Detergents segment reporting growth of 11.1%. Foods business grew by 9.4%, driven by packaged foods (up 13.4%). Others category (which includes Exports,
Chemicals & Water) grew by 18.7%.
 Gross margins fell marginally by 12 bps Y-o-Y, led by higher material cost. However, operating profit grew at a relatively better rate by 14.4%, while OPM improved by
51 bps Y-o-Y to 16.3% (12th straight quarter of margin expansion), driven by decline in the A&P cost (down 3% Y-o-Y) and lower growth in other expenses (up 8.4% Y-o-
Y, led by cost rationalization). However, higher employee cost / net sales (up 7 bps Y-o-Y) restricted further expansion in margins. On a segmental basis, Personal
Products, Beverages & Packaged foods witnessed margin expansion, while Soaps & Detergents witnessed contraction in PBIT margins.
 Reported PAT grew at a lower rate by 8.1% Y-o-Y, impacted by higher depreciation cost & tax expense (up 19.5% & 46.2% Y-o-Y respectively). Higher other income (up
33.7%) provided some cushion to PAT growth. Adjusted PAT (excluding one-off gains) grew by 7.4% Y-o-Y. EPS (Adj.) for Q2FY15 stood at Rs. 4.4 vs. Rs. 4.1 in Q2FY14.
Q-o-Q
 Sequentially, Net sales de-grew by 1.4%, operating profit de-grew by 5.7%. Reported PAT fell by 6.5%, while adjusted PAT declined by 7.3%. OPM & PAT margins fell by
80 bps & 84 bps Q-o-Q.
 The revenue growth was impacted by subdued growth in Packaged Foods, Soaps & Detergents & Personal Products (down17%, 2.4% & 0.8% Q-o-Q respectively).
However, Beverage reported healthy growth of 7.5% Q-o-Q. Profit-wise, other than beverages & other (which witnessed sequential margin expansion) all the other
business segments witnessed margin contraction.
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2. Quarterly Financials:
(Rs. in Million)
Particulars Q2FY15 Q2FY14 VAR [%] Q1FY15 VAR [%] Remarks
Net Sales 74655.4 67472 10.6 75707.8 -1.4
The Domestic Consumer business grew at 10.4% with volume growth of 5% (in line with
our expectations). HPC reported growth of 10.7% Y-o-Y with personal products growing by
9.9% (subdued) and Soaps & Detergents reporting growth of 11.1%. Foods business grew
by 9.4%, driven by packaged foods (up 13.4%). Others category grew by 18.7%.
Other Operating Income 1737.9 1454.4 19.5 1455.6 19.4
Total Operating Revenue 76393.3 68926.4 10.8 77163.4 -1.0
Total Expenditure 63973.1 58073.3 10.2 63998.0 0.0
(Inc) / Dec. in Stock in Trade 509.1 -2653.8 -119.2 -146.5 -447.5
Cons. of Raw / Packaging. Material 29746.8 29230.3 1.8 31028.2 -4.1
Material Cost / Net Sales rose 148 bps Y-o-Y & 12 bps Q-o-Q to 51.8%. Gross margins fell Y-o-
Y due to higher consumption cost on account logistics of inventory held, excise increase
impact and higher base quarter impact. However, it improved marginally on Q-o-Q basis.
Purchase of Goods 9333.9 8122.7 14.9 9014.6 3.5
Advertising & Promotions 9250.5 9540.2 -3.0 9448.8 -2.1
A&P cost / Net Sales declined by 173 bps Y-o-Y & 14 bps Q-o-Q to 12.1%. Out of total A&P
spends, 70% was on advertising and 30% on promotions. The management said that media
intensity has picked up sequentially led by high competitive intensity. However Y-o-Y
intensity was significantly lower as base quarter had witnessed exceptionally high media
intensity led by pick-up in categories like oral care.
Employees Cost 4130.1 3683 12.1 3356.7 23.0
Other Expenditure 11002.7 10150.9 8.4 11296.2 -2.6
Operating Profit 12420.2 10853.1 14.4 13165.4 -5.7
Other Income 2464.8 1844.2 33.7 2417.5 2.0
Other income includes interest, dividends & net gain on sale of other non trade current
investments Rs. 982.5 mn (Q2FY14: Rs. 963.6 mn) and dividend income from trade non-current
investments of Rs. 995.5 mn (Q2FY14: Rs. 546.3 mn).
EBIDTA 14885.0 12697.3 17.2 15582.9 -4.5
Interest 63.3 62.8 0.8 62.5 1.3
PBDT 14821.7 12634.5 17.3 15520.4 -4.5
Depreciation 763.7 639.2 19.5 667.2 14.5
PBT 14058.0 11995.3 17.2 14853.2 -5.4
Tax (incl. DT & FBT) 4176.4 2857.3 46.2 4284.7 -2.5
The effective tax rate on PBT increased by 589 bps Y-o-Y & 86 bps Q-o-Q to 29.7% on the
back of some of the facilities coming out of tax benefits. As per the management, tax rate
likely to be around 29-30% for FY15
Reported PAT 9881.6 9138.0 8.1 10568.5 -6.5 Y-o-Y PAT growth was impacted by higher depreciation cost & higher effective tax rate.
Extr. Ord. Items [gain /(loss)] 342.2 254.7 34.4 282.1 21.3 Exceptional items, net credit in Q2 include profit on sale of surplus properties Rs. 492.5 mn
(Q2FY14: Rs. 383.7 mn) & restructuring expenses Rs. 5.7 mn (Q2FY14: Rs. 49.4 mn).
Adjusted PAT 9539.4 8883.3 7.4 10286.4 -7.3
EPS 4.4 4.1 7.4 4.8 -7.3
Equity 2163.2 2162.6 0.0 2163.1 0.0
RETAIL RESEARCH Page | 2

3. Face Value 1.0 1.0 0.0 1.0 0.0
OPM (%) 16.3 15.7 3.3 17.1 -4.7 OPM expansion on Y-o-Y basis (for 13th straight quarter) was driven by lower A&P spends
and relatively lower growth in other expenses.
PBIT (%) 18.5 17.5 5.7 19.3 -4.4
PATM (%) 12.5 12.9 -3.1 13.3 -6.3
(Source: Company, HDFC Sec)
Segmental Results:
Quarterly:
(Rs. in Million)
Particulars Q2FY15 Q2FY14 VAR [%] Q1FY15 VAR [%] Remarks
Segment Revenue
Soaps & Detergents 37551 33807.7 11.1 38475.8 -2.4
 Soaps and Detergents had broad based double digit growth. In Skin Cleansing, there was
price led double digit growth. Price led growth driven by Lifebuoy, Lux and Dove. The liquids
portfolio delivered another strong quarter led by Lifebuoy.
 In Laundry, the performance was led by the premium segment as Surf sustained its strong
momentum and Rin growth further accelerated. Wheel growth continued to step-up since its
re-launch at the end of last year. Household Care growth was driven by Vim, with the liquids
portfolio doing very well.
Personal Products 21427.4 19503.4 9.9 21595.6 -0.8
 In Skin Care, Fair and Lovely and Pond's delivered volume led double digit growth. Fair and
Lovely continued to build momentum post its re-launch in Q2 FY14 while Pond's growth was
led by premium skin lightening and talc. The facial cleansing portfolio sustained high growth.
Vaseline was impacted by higher winter sell-in in base quarter.
 Hair Care registered another quarter of volume led double digit growth, driven by the robust
performance of Dove and Clinic Plus. TRESemmé added a new Spa Rejuvenation variant and
continued to make very good progress. In shampoo, sachets are growing faster.
 Oral Care had a subdued quarter largely due to a strong comparator arising from the re-launch
of Pepsodent in the base quarter. Close Up growth was driven by impactful activation
and a good initial response on Diamond Attraction.
Beverages 8991.3 8354.2 7.6 8365.6 7.5
 Beverages saw a volume led growth by tea and coffee. Tea delivered another quarter of
healthy volume growth, driven by strengthened brand equities across the portfolio and
focused in-market activities. The robust volume growth in the tea portfolio driven by
performance of Red Label and 3 Roses brands and sharper activation.
 Green Tea sales doubled, launched new flavours. Bru Coffee registered double digit growth.
Packaged Foods (including
ice cream) 4513.1 3979.8 13.4 5437.8 -17.0
 Packaged Foods saw fourth successive quarter of growth. Market development continues to
be the focus, resulting in double digit growth across all key brands. Kissan registered strong
growth on both Ketchups and Jams, driven by impactful activation and Knorr growth was led
by Instant Soups and Soupy Noodles.
 Ice Creams delivered another strong quarter, led by Magnum and through sharper in-market
execution on Kwality Walls.
RETAIL RESEARCH Page | 3

4. Others (includes Exports,
Chemicals & Water) 3618.0 3048.5 18.7 3029.1 19.4
Total 76100.8 68693.6 10.8 76903.9 -1.0
Segment Results
Soaps & Detergents 5111.9 4738.9 7.9 5318 -3.9
Personal Products 5222.6 4449.1 17.4 5966.5 -12.5
Beverages 1557 1416.7 9.9 1362.5 14.3
Packaged Foods 199.8 133.1 50.1 590.5 -66.2
Others (includes Exports,
Chemicals & Water) 115.7 46.2 150.4 -154.5 -174.9
Total 12207.0 10784.0 13.2 13083.0 -6.7
EBIT Margin (%) bps bps
Soaps & Detergents 13.6 14.0 -40 13.8 -21 High cost inventory impacted the segment margins.
Personal Products 24.4 22.8 156 27.6 -325 Y-o-Y margin expansion led by lower A&P spends; partly offset by excise exemption phase-out.
Beverages 17.3 17.0 36 16.3 103 Margin improvement witnessed both on Y-o-Y & Q-o-Q basis.
Packaged Foods 4.4 3.3 108 10.9 -643 Packaged Foods witnessed third straight quarter of margin expansion on Y-o-Y basis, which is
encouraging.
Others (includes Exports,
Chemicals & Water) 3.2 1.5 168 -5.1 830
Total PBITM 16.0 15.7 34 17.0 -97
Capital Employed
Soaps & Detergents -3776.7 -4544.5 -16.9 -4342.4 -13.0
Personal Products -6119.2 -4499.5 36.0 -6160.3 -0.7
Beverages 946.1 809.3 16.9 2435.9 -61.2
Packaged Foods 1542.3 1446.9 6.6 1574.1 -2.0
Others (includes Exports,
Chemicals & Water) -0.5 -870.6 -99.9 -105.2 -99.5
Total -7408.0 -7658.4 -3.3 -6597.9 12.3
Other Unallocable Items 60564 53886.3 12.4 50038.3 21.0
Total 53156.0 46227.9 15.0 43440.4 22.4
(Source: Company, HDFC Sec)
Other Highlights of the concall
 The management said that the overall market growth remained challenging in both volume and value terms. Market growth is one of the lowest in recent times.
Market volumes declined in the quarter while value growth remained muted at sub 4% levels. Growth was led by small SKUs and lower price-point packs. In some
categories like Hair, regional/unbranded players are ceding space to branded players.
RETAIL RESEARCH Page | 4

5.  The management highlighted that it is looking to consolidate the number of sub-segments Pepsodent operates in to revive the brand although it may continue to
operate select sub-segments in select clusters as identified under the new operating structure WIMI.
 The management said that input cost inflation has started trending down towards later part of the quarter.
 Rural growth for company continues to outpace urban growth aided by strong rural-focused activations and distribution expansion.
 Nielsen study of correlation between consumer sentiments and the company's categories performance showed categories improve with a lag of 2-3 quarters.
 The company has kicked off a new operating framework, WIMI or 'winning in many Indias', which deals in distinct consumer clusters that are expected to make the
organization future ready. The new structure will transform HUL from a four-branch structure at the front end to 14 distinct consumer clusters that will roll up into five
sales branches, based in seven locations. The WIMI operating framework is a planning and execution framework with which all the company's functions of sales,
marketing, supply chain and finance will operate. With WIMI in place, there will be cluster heads, who will report into the branch manager, who in turn will report to
the head of customer development. The premise behind WIMI is that India is not a homogeneous entity and all categories are in different stages of evolution in
different parts of India, besides the fact that the company's strength varies across the landscape of the country. With WIMI, HUL aims to get a more granular
understanding of changing consumer profiles, competition across geographies and develop an intense go-to-market strategy.
 During the quarter, the Company has adopted estimated useful life of fixed assets as stipulated by Schedule II to the Companies Act 2013, applicable for accounting
periods commencing 1st April 2014 or re-assessed useful life based on technical evaluation. Accordingly, depreciation of Rs 790 lakhs (net of deferred tax of Rs 407
lakhs) on account of assets whose useful life is already exhausted as on 1st April 2014 has been adjusted against retained earnings. Depreciation for the quarter
includes an amount of Rs 963 lakhs (including Q1FY15: Rs 480 lakhs) consequent to the revision in useful life effective 1st April 2014.
Conclusion & Recommendation:
HUL’s Q2FY15 results were more or less in line with our estimates with lack of any positive surprises. Volume growth of 5% Y-o-Y was not very encouraging, though it was
on expected lines. Selective price hikes further supported the overall revenue growth. We were happy with the double digit growth reported by soaps & detergents (price
led) & packaged foods personal products. However, single digit growth in Personal products & Beverages was disappointing. 13th straight quarter of margin expansion
(on an overall basis) was a positive highlight of quarter, led by lower A&P spends and cost cutting initiatives across the supply chain.
We continue to remain cautious in the coming quarters on account of ongoing slow down in rural growth, intensifying competition, below normal monsoon (though the
deficit was lower than expectations) and slowdown in certain discretionary categories like personal products & packaged foods segment. Price sensitiveness and
increased competition from global majors such as P&G and L’Oréal could limit a speedy recovery in Personal Products segment (though gradual recovery cannot be ruled
out). The recovery in the overall volume growth is likely to be gradual (could remain in mid to high single digits over the next one year), unless the economic growth picks
up sharply in the next few months (gradual recovery expected from H2FY15). Volume growth would continue to remain a key focus area for the company.
The recent decline in the palm oil prices (towards the end of Q2) could lead to expansion in gross margins in the coming quarters. That coupled with cost cutting
initiatives could aid in OPM improvement. However, we feel competitive intensity in certain categories could lead to higher A&P spends in the coming quarters. We
would continue to monitor the trends in margins going forward. Expected rise in tax rates could keep EPS growth muted in the near future.
The demand from rural India is likely to remain subdued in the near term due to below-normal rainfall. Further competition in the soap & detergent segment could
increase in the coming quarters, as regional players may become more aggressive in a falling raw material price environment. However expected acceleration in PAT
growth, 75% dividend payout, 100% ROE and 140% ROCE are some factors in favour of the stock.
RETAIL RESEARCH Page | 5

6. We feel HUL is on track to meet our FY15 & FY16 growth projections. Hence we are keeping the same unchanged. At CMP, HUL trades at 34.8xFY16E EPS. HUL remains a
core portfolio holding on the back of its robust product pipeline, its strong product portfolio & vast & expanding distribution network. However, the current valuations
are not cheap and the stock offers limited upside from current levels. Valuing the stock at 35.5xFY16E EPS (which would still be at a discount to some of its MNC
competitors despite HUL’s larger business size), we arrive at price target of Rs. 747. One should buy the stock only on dips to Rs. 673-694 (32-33xFY16E EPS) to earn
decent returns over the next quarter.
Unilever now has a 67.3% holding in HUL. As it intends to increase its stake to 75%, the stock price may not materially fall. However upsides also remain restricted on the
back of high valuations & till the economic slowdown comes to an end and cost pressures ease significantly.
Financial Estimations: (Quick Estimates)
(Rs. in Million)
Particulars FY12 FY13 FY14 FY15 (E) FY16 (E)
Total Operating Revenue 221164 258102 280191 314776 352549.1
Operating Profit 32568 40038 44753 51938 59580.8
Adjusted PAT 25992 33276 36927 40291 45478.8
Adjusted EPS 12.0 15.4 17.1 18.6 21.0
OPM (%) 14.7 15.5 16.0 16.5 16.9
PATM (%) 11.8 12.9 13.2 12.8 12.9
PE 60.8 47.5 42.8 39.3 34.8
(Source: Company, HDFC Sec Estimates)
Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
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