26-Oct-17

Key Highlights of the Report:

52wk Range H/L

Mkt Capital (Rs Cr)

Av. Volume (,000)

Financials/Valu

ation

FY15 FY16 FY17 FY18E FY19ENet Sales 31,972 32,186 33,162 35,472 39,150

EBITDA 5,414 6,020 6,340 7,543 8,736

EBIT 5,091 5,667 5,908 7,022 8,221

PAT 3,918 4,172 4,328 5,076 5,920

2QFY18 1QFY18 4QFY17 EPS (Rs) 18 19 20 23 27

Promoters 67 67 67 EPS growth (%) 4% 6% 4% 17% 16%

Public 33 33 33 ROE (%) 108% 63% 67% 72% 81%

Others - - - ROCE (%) 125% 84% 84% 96% 108%

Total 100 100 100 BV 19 30 31 32 34

P/B (X) 34 28 27 39 38

1Mn 3Mn 1Yr P/E (x) 31 44 41 54 46

Absolute (0.5) 10.5 51.5

Rel.to Nifty (2.0) 6.5 33.2 HINDUNILVR’s different segments performance analysis :

INDUSTRY - Con. Staples

1,228

Upside -3%

1287/783

HUVR IN

BSE Code - 500696

NSE Code - HINDUNILVR

RAJEEV ANANDrajeev.anand@narnolia.com

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

RoE & ROCE

2,75,657

NIFTY -

CMP 1274

BLOOMBERG -

HUL has posted a decent set of numbers for Q2FY18. On comparable

basis revenue grew by 9% YoY to Rs 8309 cr led by 4% volume growth.Target Price 1231

10295

The company launched new RO 2-in -1 range in this quarter. And also

launched multiple variant of Soups and Noodles in Q2FY18.

EBITDA grew handsomely by 20% YoY to Rs 1682 cr in this quarter while

EBITDA margin improved by 370 bps. On comparable basis EBITDA

margin improved by 180 bps YoY.

The company cut the prices by 3-4% to pass on net GST benefits to the

consumers in Q2FY18.

PAT for this quarter grew by 17% YoY to Rs 1276 cr.

We expect HUL to report 17% PAT CAGR over FY17-19. We value it at

45 times of FY19’s EPS and get a target of Rs 1231, around which HUL

is presently trading at. Hence considering its stretch valuation we

maintain our earlier stance of Neutral.

On comparable basis, home care business grew by 13% YoY led by

robust volume growth. PBIT growth remained 37% YoY.

Personal care business grew by 8% YoY (comparable basis) in Q2FY18.

Growth remained broad based across Personal Products and Personal

Wash. At PBIT level growth was around 3%.

Company’s Foods business has shown a growth of 11% YoY led by

strong performance driven by Kissan.

Refreshment grew by 10% YoY on the back of strong broad based growth

in tea ,ice cream and frozen foods.

Company Data

Stock Performance %

Shareholding patterns %

80

90

100

110

120

130

140

150 HINDUNILVR NIFTY

108%

63% 67%72%

81%

125%

84% 84%

96%

108%

0%

20%

40%

60%

80%

100%

120%

140%

FY15 FY16 FY17 FY18E FY19E

ROE ROCE

Financials 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY % QoQ% FY16 FY17 YoY %

Net Sales 8,480 8,318 8,886 8,529 8,309 -2% -3% 32,186 33,162 3%

Other Income 253 82 83 113 204 -19% 81% 423 369 -13%

COGS 3,962 3,745 4,022 4,084 3,929 -1% -4% 15,867 16,313 3%

Employee Cost 396 409 388 419 435 10% 4% 1,680 1,743 4%

A&P expenses 851 885 853 905 1,023 20% 13%

Other Expenses 1,229 1,312 1,299 1,255 1,240 1% -1% 8,619 8,766 2%

EBITDA 1,405 1,355 1,651 1,866 1,682 20% -10% 6,020 6,340 5%

Depreciation 95 100 108 114 115 22% 1% 353 432 22%

Interest 5 5 6 6 6 21% 0% 17 35 106%

PBT 1,576 1,486 1,619 1,846 1,801 14% -2% 6,073 6,242 3%

Tax 481 448 436 563 525 9% -7% 1,875 1,977 5%

PAT 1,096 1,038 1,183 1,283 1,276 16% -1% 4,151 4,490 8%

HUL’s Q2FY18 Result analysis :

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Quarterly Performance

PAT margin improved by 244 bps YoY and company reported a PAT of Rs 1276, a growth of 17%

YoY.

The company’s advertising and promotion expenses went by 20% YoY to Rs 1223 cr from Rs 851

cr due to new product launches and nationwide launch related promotional activities of Lever

Ayush. The company had launched Lever Ayush nationally in Q1FY18.

HUL has posted sales decline of 2% YoY due to change in GST related accounting. On comparable

basis sales grew by 9%. Reduction of excise duty(8%of sales) and net input tax (3%) from sales

gives us reported decline.

Company’s Comparable domestic revenue growth for this quarter was 10% mainly due to better

performance of home care business (dominated by Vim), foods and refreshments.

On comparable basis EBITDA margin improved by 180 bps YoY. Improvement of 190 bps of

EBITDA margin, apart from 180 bps, mainly came from net excise duty ( 140 bps) and net input

taxed (50 bps) .

6%

7%

6%

4% 4%

-1%

-4%

4%

0%

4%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Hindunilvr's Volume gr. YoY

Home

care, 33%

Personal care, 47%

Foods, 3%

Refreshment,

15%

Others, 2%

Revenue break up Q2FY18

Standalone figure Consolidated figureMargin % 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY(+/-) QoQ(+/-) FY16 FY17 YoY(+/-)

Gross Margin 53.3% 55.0% 54.7% 52.1% 52.7% -0.57% 0.60% 50.7% 50.8% 0.11%

EBITDA Margin 16.6% 16.3% 18.6% 21.9% 20.2% 3.68% -1.64% 18.7% 19.1% 0.41%

PAT Margin 12.9% 12.5% 13.3% 15.0% 15.4% 2.44% 0.31% 12.9% 13.5% 0.64%

HUL’s EBITDA grew by 20% YoY. EBITDA margin improved by 370 bps YoY.

Management sees input cost inflation going ahead.

Tax rate for FY18: around 30%.

Modern trade which accounts for 12% of company’s total revenue is growing much faster.

CSD which contributes 7% of HUL’s revenue has normalised up to 80-85%.

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

EBITDA grew handsomely by 20% YoY to Rs 1682 cr in this quarter while EBITDA margin improved

by 370 bps. On comparable basis EBITDA margin improved by 180 bps YoY.

Concall & Mgt. Highlights(Q2FY18):

Improvement of 190 bps of EBITDA margin ,apart from 180 bps, mainly came from net excise duty (

140 bps) and net input taxed (50 bps) .

PAT margin improved by 244 bps YoY and company reported a PAT of Rs 1276, a growth of 17%

YoY.

Sales number is not comparable due to GST led accounting change. Reported turnover is

lower but no impact in EBITDA while EBITDA margin remain higher.

Indulekha and Ayush, both are doing well. Indulekha has very less penetration hence it has

huge scope for growth in times to come.

Management has reiterate its commitment towards volume driven growth and moderate

improvement in operating margin.

According to management, transition to GST impacted trade in early part of the quarter; Now

there is gradual recovery.

Oral care: oral care performance remained subdued in Q2FY18. It will take few more quarters

to turnaround.

Presently rural and urban market are performing at par. Management sees gradual recovery in

rural demand going forward.

15%

8% 7%

12%

8%

5%

-5%

12%14%

20%

-10%

-5%

0%

5%

10%

15%

20%

25%

EBITDA growth YoY

19%

16%17% 18%

19%

17% 16%

19%20% 20%

14%12% 12%

13% 13% 13% 12%13% 14%

15%

0%

5%

10%

15%

20%

25%

EBITDA margin NPM

HUL’s Sales and sales growth YoY. A&P expenses went up by 20% YoY in Q2FY18.

View & Valuation

Investment Arguments:

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Strong Focus on margin improvement: The company is focusing on the improvement of margin by

premiumisation of the product portfolio and cost optimization programme mainly by prudent advertising

strategy. It aims to save ~6% of revenue through cost initiatives which will ploughed back to

company’s further expansion plan. We expect that these initiatives will ensure margin improvement for

HUL going ahead.

Garner benefit from rural presence: HUL has larger presence in rural areas as compared to most of

the other FMCG players in our FMCG horizon. Any recovery in rural economy will pave the way for

higher volume growth for HUL. We expect rural demand to pick in 2HFY18 considering two

consecutive year of relatively better monsoon and governments rural initiatives.

HUL is the one of the most efficiently managed company in our FMCG pack, with market leadership in

soaps, detergents and personal care categories.HUL has reported revenue growth 9%in comparable

basis with the PAT growth of 17% YoY. Volume growth for this quarter remained 4%on the back of

restocking of channels. Going forward we expect better volume growth for the company led by rural

demand recovery considering two consecutive relatively better monsoon and new product launches.

Margin improvement is also on cards on the back of cost rationalization initiatives, premiumization and

operating leverage. We expect HUL to report 17% PAT CAGR over FY17-19. We value it at 45 times

of FY19’s EPS and get a target of Rs 1231 around which HUL is presently trading at. Hence

considering its stretch valuation we maintain our earlier stance of Neutral.

Market share gain on cards: GST and demonetization have impacted the network of wholesalers.

And in this scenario, the company which has large direct reach will benefit the most. HUL’s direct

reach is much wider than other FMCG players which may benefit it in gaining market share going

ahead not only from establishing player but also from local and unorganised players which have higher

wholesale dependence.

Product innovation and launch of new product: HUL has long term history of innovation and new

product launches. The company has recently launched Citra nationally and now planning for Lever

Ayush the same. HUL is moving towards the naturals portfolio which will help it to tap rapidly

growing Ayurvedic market. Going forward we expect that new product launches will help company to

garner better volume growth.

11% 11% 11%10% 10% 10%

11%10%

11%

12%

0%

2%

4%

6%

8%

10%

12%

14%

Ad & P expenses

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

7000

7500

8000

8500

9000

9500

Sales Growth YoY

Income Statement Rs in Crores Key Ratios

Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E

Revenue from Operation 32,186 33,162 35,472 39,150 ROE 63% 67% 72% 81%

Change (%) 1% 3% 7% 10% ROCE 84% 84% 96% 108%

Other Operating Income Asset Turnover 2.2 2.1 2.2 2.2

EBITDA 6,020 6,340 7,543 8,736 Debtor Days 14 12 12 12

Change (%) 11% 5% 19% 16% Inventory Days 31 28 28 28

Margin (%) 19% 19% 21% 22% Payable Days 64 68 68 68

Dep & Amortization 353 432 521 515 Interest Coverage 333 169 184 207

EBIT 5,667 5,908 7,022 8,221 P/E 44 41 54 46

Interest & other finance cost 17 35 38 40 Price / Book Value 28 27 39 38

Other Income 423 369 392 421 EV/EBITDA 30 29 36 31

EBT 6,073 6,242 7,375 8,602 FCF per Share 16 17 25 29

Exceptional Item (31) 237 - - Dividend Yield 1.8% 1.9% 1.5% 1.7%

Tax 1,875 1,977 2,299 2,681

Minority Int & P/L share of Ass. Assumptions

Reported PAT 4,151 4,490 5,076 5,920 Y/E March FY16 FY17 FY18E FY19E

Adjusted PAT 4,172 4,328 5,076 5,920 Volume growth 6% 1% 7% 7%

Change (%) 6% 4% 17% 17% Pricing growth -2% 2% 3% 4%

Margin(%) 13% 13% 14% 15%

Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores

Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E

Share Capital 216 216 216 216 PBT 6,058 6,229 7,375 8,602

Reserves 6,357 6,528 6,811 7,098 (inc)/Dec in Working Capital (81) 715 137 270

Networth 6,573 6,744 7,027 7,315 Non Cash Op Exp 373 455 521 515

Debt 177 277 277 277 Interest Paid (+) 17 35 38 40

Other Non Current Liab 1,134 1,226 1,162 1,112 Tax Paid (1,765) (1,859) (2,299) (2,681)

Total Capital Employed 6,750 7,021 7,304 7,592 others (356) (283) - -

Net Fixed Assets (incl CWIP) 3,585 4,567 4,497 4,427 CF from Op. Activities 4,171 5,185 5,772 6,745

Non Current Investments - - - - (inc)/Dec in FA & CWIP (772) (1,452) (451) (445)

Other Non Current Assets 4,449 5,488 5,418 5,348 Free Cashflow 3,399 3,733 5,321 6,300

Non Current Assets 4,449 5,488 5,418 5,348 (Pur)/Sale of Investment 271 (1,132) (212) (500)

Inventory 2,726 2,541 2,718 3,000 others 59 1,267 52 18

Debtors 1,264 1,085 1,161 1,281 CF from Inv. Activities (282) (1,173) (611) (927)

Cash & Bank 3,009 1,828 2,106 2,232 inc/(dec) in NW - - - -

Other Current Assets 3,346 4,764 5,041 5,644 inc/(dec) in Debt 177 100 - -

Current Assets 10,345 10,218 11,025 12,157 Interest Paid (2) (14) (38) (40)

Creditors 5,685 6,186 6,617 7,303 Dividend Paid (inc tax) (4,027) (4,289) (4,845) (5,651)

Provisions 293 392 419 463 others - - - -

Other Current Liabilities 912 859 919 1,014 CF from Fin. Activities (3,864) (4,214) (4,883) (5,691)

Curr Liabilities 6,890 7,437 7,955 8,780 Inc(Dec) in Cash 25 (202) 278 127

Net Current Assets 3,455 2,781 3,070 3,377 Add: Opening Balance 805 830 1,828 2,106

Total Assets 14,794 15,706 16,443 17,505 Closing Balance 830 628 2,106 2,232

Financials Snap Shot

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Narnolia Securities Ltd201 | 2nd Floor | Marble Arch Build ing | 236B-AJC Bose

Road | Kolkata-700 020 , Ph : 033-40501500

email: narnolia@narnolia.com,

website : www.narnolia.com

Risk Disclosure & Disclaimer: This report/message is for the personal information of

the authorized recipient and does not construe to be any investment, legal or taxation

advice to you. Narnolia Securities Ltd. (Hereinafter referred as NSL) is not soliciting any

action based upon it. This report/message is not for public distribution and has been

furnished to you solely for your information and should not be reproduced or

redistributed to any other person in any from. The report/message is based upon publicly

available information, findings of our research wing “East wind” & information that we

consider reliable, but we do not represent that it is accurate or complete and we do not

provide any express or implied warranty of any kind, and also these are subject to change

without notice. The recipients of this report should rely on their own investigations,

should use their own judgment for taking any investment decisions keeping in mind that

past performance is not necessarily a guide to future performance & that the the value of

any investment or income are subject to market and other risks. Further it will be safe to

assume that NSL and /or its Group or associate Companies, their Directors, affiliates

and/or employees may have interests/ positions, financial or otherwise, individually or

otherwise in the recommended/mentioned securities/mutual funds/ model funds and

other investment products which may be added or disposed including & other mentioned

in this report/message.