Hindustan Unilever
A healthy recipe
The company is showing encouraging trend in sales growth as well as on margin front and buyback proposal has added spice to this recipe
| Buy | Hindustan Unilever |
| BSE Code | 500696 |
| NSE Code | HINDUNILVR |
| Bloomberg | HUVR@IN |
| Reuter | HLL.BO |
| 52-week High/Low | Rs 263 / Rs 166 |
| Current Price | Rs 196 (as on 22nd August 2007) |
Hindustan Unilever (HUL) (formerly Hindustan Lever) is the largest consumer non-durables company in Asia. 51.6%-owned by the Unilever Group, HUL has one of the best-managed businesses in India and a record of steady growth spanning decades.
The primary strengths of HUL are its powerful brands and an envious distribution network. HUL operates through five segments—soaps & detergents, personal products, beverages, foods, ice creams, exports and other operations. Some of the strongest brands in India such as Lifebuoy, Lux, Surf, Wheel, Lakme, Ponds and Lipton are from the HUL stable.
HUL’s operating performance has shown a dramatic improvement despite losses associated with new water business. June quarter OP growth of 23% is the highest for the last six years. After significant investment behind brands, HUL seems to be now in a position to scale back its ad spend and still grow sales at a faster rate.
June 2007 quarter sales rise by 13%, PAT by 30%
The company’s sales for the quarter ended June 2007 increased by 13% to Rs 3481.40 crore. The FMCG sales grew by 13% driven by sales in home & personal care (HPC) and food business.
HPC business grew 11% for the June ended quarter. In it, all brands in laundry and shampoo continued to perform well. Personal wash growth was driven by a strong performance in Lux and Breeze.
Foods business showed sales growth of 25%. In it, the beverages business grew by 21% with all tea brands, Taj, 3 Roses, Red Label and Taaza, performing well. Bru Coffee continued its excellent performance this quarter also. Knorr and Kissan brands were the drivers of a 38% growth in the processed foods category. Ice-cream business had a robust 24% growth in this quarter.
The increase in product prices together with buying efficiencies and aggressive cost saving initiatives helped the company to sustain its margin. Thus, OPM of the company grew by 126 basis points to 14.7%, This resulted in increase in operating profit by 23% to Rs 511.95 crore.
Other income increased 31% to Rs 106.32 crore leading to increase in profit before interest, depreciation and tax (PBIDT) by 25% to Rs 618.27 crore. Interest paid by the company increased by huge 222% to Rs 11.04 crore. Depreciation also saw a rise of 11% to Rs 33.29 crore. Profit before tax (PBT) increased by 24% to Rs 573.94 crore.
Tax outgo for the quarter ended June increased by 23% to Rs 102.03 crore. PAT increased 24%. Extraordinary (EO) income net of tax, sky rocketed to Rs 21.17 crore compared to Rs 1.33 crore in the corresponding quarter of previous year. This EO items net of tax for June ended quarter 2007 comprise: profit from the sale of a property of Rs 27.4 crore, cost relating to restructuring and voluntary retirement schemes of Rs 5.2 crore and provision for diminution in value of investments in a subsidiary of Rs 1 crore. As a result, the company had a net profit of Rs 493.08, a growth of 30%.
For the half year ended June 2007, its sales increased by 13% to Rs 6665.72 crore. OPM improved by 44 basis points to 13.1% due to decline in raw material cost by 200 basis points to 39%, ASP cost by 60 basis points to 10% and other expenditure by 30 basis points to 16%. However, cost of good purchased and staff cost increased by 230 basis points to 16% and 10 basis points to 6%. Operating profit increased by 17% to Rs 873.92 crore. Other income jumped 31% to Rs 197.12 crore. Interest cost increased 195% to Rs 16.17 crore, while depreciation rose 4% to Rs 66.19 crore. Thus, PBT was up 20% to Rs 988.60 crore. Total tax paid by the company increased by 19% to Rs 182.90 crore. Thus, PAT before EO increased by 20%.
Segment results- Soaps & detergents, Personal care and Beverages lead growth
Soaps & detergents
The revenues of the soaps & detergents business of the company grew by 15% to Rs 1668.70 crore for the quarter ended June 2007. PBIT margins rose 180 basis points to 16.1% leading to 29 growth in PBIT to Rs 268.37crore. The category contributed around 47% to the company’s revenues while the contribution to PBIT stood at 47%.
For the half year ended June 2007, the revenue of this category grew by 12% to Rs 3113.23 crore. PBIT margins of the division was up by 120 basis points to 14.2% leading to a 23% rise in PBIT to Rs 442.79 crore. The category contributed around 47% to the company’s revenues while the contribution to PBIT stood at 44%.
Personal care
Revenues of the personal products division grew 6% to Rs 897.77 crore for the quarter ended June 2007. PBIT margins of the business improved by 80 basis points to 29.3% that led to a rise of 9% in PBIT to Rs 263.21 crore. The category contributed around 26% to the company’s revenues while the contribution to PBIT stood at 46%.
For the half year ended June 2007, the revenue of this category grew by 7% to Rs 1719.90 crore. PBIT margins of the division inclined by 60 basis points to 27.1% leading to increase in PBIT growing by 9% to Rs 466.23 crore. The category contributed around 27% to the company’s revenues while the contribution to PBIT stood at 46%.
Beverages
Sales of the beverage division grew by 21% to Rs 363.29 crore. The segment contributed 10% to company’s total revenues. PBIT margins rose 210 basis points to 15.7%, which resulted in 40% rise in PBIT to Rs 56.89 crore. It contributes 10% to the company’s total PBIT.
For the half year ended June 2007, the revenue of this category grew by 19% to Rs 733.78 crore. PBIT margins fell by 130 basis points to 15.3% and PBIT grew by 10% to Rs 112.48 crore. The category contributed around 11% to the total revenues and total PBIT stood of the company.
Processed Foods
Sales of the processed foods division grew by 37% to Rs 133.41 crore. PBIT margins turned negative to 1.4%, leading to PBIT loss of Rs 1.93 crore. The category contributed around 4% to the company’s revenues while the contribution to PBIT stood at negative 1%.
For the half year ended June 2007, the revenue of this category grew by 43% to Rs 264.53 crore. PBIT margins of the division fell by 40 basis points to 2.1%. However, PBIT grew 21% to Rs 5.45 crore. The category contributed around 3% to the company’s revenues while the contribution to PBIT stood at 1%.
Ice-creams
Ice-creams division saw sales grow by 23% to Rs 62.17 crore. PBIT margins decreased by 440 basis points to 17.1% leading to 2% decline in PBIT to Rs 10.66 crore. The category contributed just 2% to the total revenues and total PBIT of the company.
For the half year ended June 2007, revenue of this category grew by 23% to Rs 94.40 crore. PBIT margins of the division fell 260 basis points to 12.7%. However, PBIT grew 2% to Rs 11.97 crore. The category contributed around 1% to total revenue and total PBIT of the company.
Share buyback and sale of properties - near term positives
HUL has announced that its board of directors (BoD) has approved share buyback plan wherein the company will buyback its shares at a price not exceeding Rs 230 per share and up to an aggregate amount of Rs 630 crore, being within 25% of the total paid-up capital and free reserves.
The company proposes to buy back shares through open market purchases from time to time. The buyback is proposal is to effectively utilize the surplus cash and make the balance sheet leaner and more efficient to improve returns.
This company also plans to sell off its non core assets and properties in cities like Mumbai and Bangalore. HUL has already sold off one of its properties for Rs 27.4 crore in this quarter and may sell more to unlock value.
Several new products launched
The company has launched several new products during the quarter. They are Knorr Chinese mix, Bru Iced Cappuccino, the Moo Ice cream range, Dove Hair Care, Clinic All Clear variants for men, Lifebuoy Skin-guard, Lakme Sun Expert and Pepsodent center Fresh.
Making a strong pitch for becoming a sourcing hub for Unilever in HPC products
The company has been making a strong pitch for becoming a sourcing hub for Unilever and is being considered for various global projects. Going forward, there are robust growth plans based on the projects in the pipeline for manufacturing of various highend skin care products in India. While the business will continue to be challenged by other low cost sources in Asia, the company is confident of retaining and securing business opportunities given it's past record of quick roll out of new innovations and it's export skills. Buoyancy in HPC exports is expected to be sustained.
Buoyant outlook
Till date, the southwest monsoon has been fairly widespread and normal. A favourable monsoon will significantly increase the rural income in the current year. This is particularly positive for HUL for whom the rural markets account for an estimated 50% of incremental growth. This will pave the way for a reasonable sales growth, besides even better profitability.
For the long-term, there is no doubt about its prospects. Increasing urbanisation, improving literacy level, expanding media reach, growing disposable income, changing attitudes and aspirations and a young and growing population all will ensure sustained growth.
Consider these: The per capita consumption of personal wash products in India is 0.5 kg compared to 1.1 kg in Brazil and 2 kg in USA, for fabric wash the figure is 2.6 kg in India compared to 7.2 for Brazil and 13.1 in USA.
The per capita consumption for other products is also currently very low. Toothpaste: 40 ml in India, 358 ml in Brazil and 299 ml in USA, shampoo: 16 ml in India, 444 ml in Brazil and 1,018 in USA, ice cream: 0.98 ltr in India, 1 ltr in Brazil and 22 ltr in the USA.
All these indicate very low level of penetration and tremendous growth prospects. High GDP growth and increase in per capita income is bound to more than proportionately increase demand for the company's products.
Valuation
In FY 2007 (ending December 2007) we expect the company to register sales and net profit of 13696.70 crore and Rs 1905.48 crore respectively. On equity of Rs 220.70 crore and face value Re 1 per share, EPS works out to Rs 8.3. The share price trades at Rs 196. P/E works out to reasonable 23.6.
| | 0412(12) | 0512 (12) | 0612 (12) | 0712 (12P) |
| Sales | 9926.95 | 11060.55 | 12103.39 | 13696.70 |
| OPM (%) | 14.5 | 13.0 | 13.6 | 14.1 |
| OP | 1437.37 | 1443.33 | 1648.06 | 1928.57 |
| Other inc. | 318.84 | 304.78 | 354.52 | 451.82 |
| PBIDT | 1756.21 | 1748.11 | 2002.58 | 2380.39 |
| Interest (Net) | 129.98 | 19.19 | 10.74 | 32.17 |
| PBDT | 1626.23 | 1728.92 | 1991.84 | 2348.22 |
| Dep. | 120.90 | 124.45 | 130.16 | 135.75 |
| PBT | 1505.33 | 1604.47 | 1861.68 | 2212.47 |
| Total Tax | 320.74 | 249.96 | 322.01 | 387.18 |
| PAT before EO | 1184.59 | 1354.51 | 1539.67 | 1825.28 |
| EO | 12.77 | 53.59 | 315.7 | 80.20 |
| Net profit | 1197.36 | 1408.1 | 1855.37 | 1905.48 |
| EPS * | 5.4 | 6.1 | 7.0 | 8.3 |
| *Annualised on current equity of Rs 220.70 crore; Face Value Re 1 each | ||||
| Hindustan Unilever: Results |
| | 0706 (03) | 0606 (03) | Var. (%) | 0706 (06) | 0606 (06) | Var. (%) | 0612 (12) | 0512 (12) | Var. (%) |
| Sales | 3481.4 | 3083.23 | 13 | 6665.72 | 5881.28 | 13 | 12103.39 | 11060.55 | 9 |
| OPM (%) | 14.7 | 13.4 | | 13.1 | 12.7 | | 13.6 | 13.0 | |
| OP | 511.95 | 414.59 | 23 | 873.92 | 745.14 | 17 | 1648.06 | 1443.33 | 14 |
| Other inc. | 106.32 | 81.4 | 31 | 197.12 | 150.76 | 31 | 354.52 | 304.78 | 16 |
| PBIDT | 618.27 | 495.99 | 25 | 1071.04 | 895.9 | 20 | 2002.58 | 1748.11 | 15 |
| Interest (Net) | 11.04 | 3.43 | 222 | 16.17 | 5.48 | 195 | 10.74 | 19.19 | -44 |
| PBDT | 607.23 | 492.56 | 23 | 1054.87 | 890.42 | 18 | 1991.84 | 1728.92 | 15 |
| Dep. | 33.29 | 30.05 | 11 | 66.19 | 63.91 | 4 | 130.16 | 124.45 | 5 |
| PBT | 573.94 | 462.51 | 24 | 988.68 | 826.51 | 20 | 1861.68 | 1604.47 | 16 |
| Total Tax | 102.03 | 83.25 | 23 | 182.9 | 153.27 | 19 | 322.01 | 249.96 | 29 |
| PAT before EO | 471.91 | 379.26 | 24 | 805.78 | 673.24 | 20 | 1539.67 | 1354.51 | 14 |
| EO | 21.17 | 1.33 | 1492 | 80.2 | 150.21 | -47 | 315.7 | 53.59 | 489 |
| Net profit | 493.08 | 380.59 | 30 | 885.98 | 823.45 | 8 | 1855.37 | 1408.1 | 32 |
| EPS * | 8.6 | 6.9 | | 7.3 | 6.1 | | 7.0 | 6.1 | |
| *Annualised on current equity of Rs 220.70 crore; Face Value Re 1 each | |||||||||
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