KEY DATA Upping smartness and ESG quotient

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

KEY DATA

Rating BUY Sector relative Outperformer Price (INR) 2,444 12 month price target (INR) 2,900 Market cap (INR bn/USD bn) 5,743/77.0 Free float/Foreign ownership (%) 38.1/14.5

What’s Changed

Target Price ⚊

Rating/Risk Rating ⚊

INVESTMENT METRICS

Upping smartness and ESG quotient

HUL has launched a ‘Smart Fill’ machine for three brands (Surf Excel, Comfort and Vim) with the aim to promote plastic reuse. This pilot is being run at a Reliance Smart outlet. Should the pilot succeed, the project will be scaled up across retailers. It would be a win-win for both HUL and the consumer. Since India is the largest volume market for Unilever, HUL continues to get a disproportionate priority in terms of

innovations from the parent.

In this report, we look at similar initiatives around the world. All in all, we expect HUL to be a key beneficiary of recovery in rural demand and expect FY22 to fare strongly on pricing growth. Retain ‘BUY’.

FINANCIALS (INR mn)

Year to March FY20A FY21E FY22E FY23E

Revenue 3,97,830 4,70,280 5,31,121 5,79,710

EBITDA 98,610 1,16,260 1,34,052 1,52,138

Adjusted profit 67,640 80,000 96,726 1,12,499

Diluted EPS (INR) 31.2 34.0 41.2 47.9

EPS growth (%) 11.6 9.0 20.9 16.3

RoAE (%) 86.5 29.5 20.1 22.9

P/E (x) 78.2 71.8 59.4 51.1

EV/EBITDA (x) 57.6 48.8 42.2 37.0

Dividend yield (%) 1.1 1.7 1.5 1.8

PRICE PERFORMANCE

What is a ‘Smart Fill’ machine? Any similar initiatives before?

This initiative offers consumers an option to reuse their plastic bottles by refilling

certain HUL products through the use of a smart ‘refillery’. As an incentive

consumers are being offered INR30 off on the MRP or on effective price at the store

if they get their own bottle and INR15 off on purchasing the Smart Fill bottle. We

look forward to seeing more additions, especially in body wash, hand wash and hair

care products. If successful, this project will be scaled up across retailers. HUL’s

parent Unilever is taking similar initiatives in Europe. Its competitor P&G is also

conducting similar pilots in some markets.

HUL at forefront of ESG

HUL will launch recyclable toothpaste tubes in India. The company has committed

to ensuring that 100% of its plastic packaging would be reusable, recyclable, or

compostable by 2025. It has further committed to halving the use of virgin plastic by

reducing the absolute use of plastic packaging and accelerating use of recycled

plastic. HUL will also enable collection and processing of over 100,000 tons of post-

consumer plastic waste through its partners across the country.

Explore:

Outlook and valuation: Recovery underway; maintain ‘BUY’

In this report, we look at details of the initiative in India, some pilot programs

undertaken by the parent abroad and similar initiatives by other players worldwide.

Maintain ‘BUY’ on HUL as we expect it to be a key beneficiary of recovery in rural

demand and FY22 to fare strongly on pricing growth. Key near-term variables are

potential corrections in tea and palm oil prices.

In terms of the covid-19 impact, we believe the demand situation is fluid; however,

HUL is well placed in terms of its supply chain. Retain ‘BUY/SO’ with a TP of INR2,900.

The stock is trading at 51.1x FY23E EPS.

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Consumer Staples HUVR IN Equity

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HUVR IN Equity Sensex

India Equity Research Consumer Staples July 13, 2021

HINDUSTAN UNILEVER COMPANY UPDATE

Abneesh Roy Tushar Sundrani +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected]

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HINDUSTAN UNILEVER

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Financial Statements

Income Statement (INR mn) Year to March FY20A FY21E FY22E FY23E

Total operating income 3,97,830 4,70,280 5,31,121 5,79,710

Gross profit 2,15,240 2,48,800 2,84,554 3,13,497

Employee costs 18,200 23,580 25,617 26,214

Other expenses 47,130 47,540 59,240 64,078

EBITDA 98,610 1,16,260 1,34,052 1,52,138

Depreciation 10,020 10,740 10,808 11,452

Less: Interest expense 1,180 1,170 1,150 1,150

Add: Other income 6,320 4,100 8,616 10,865

Profit before tax 93,730 1,08,450 1,30,710 1,50,400

Prov for tax 24,090 26,060 33,985 37,901

Less: Other adj 0 0 0 0

Reported profit 69,640 82,390 96,726 1,12,499

Less: Excp.item (net) (2,000) (2,390) 0 0

Adjusted profit 67,640 80,000 96,726 1,12,499

Diluted shares o/s 2,165 2,350 2,350 2,350

Adjusted diluted EPS 31.2 34.0 41.2 47.9

DPS (INR) 26.2 40.5 37.0 43.1

Tax rate (%) 25.7 24.0 26.0 25.2

Important Ratios (%) Year to March FY20A FY21E FY22E FY23E

Other exp (% of rev) 12.9 13.1 12.4 12.3

Con A&P (% of rev) 12.0 10.3 11.3 11.2

Gross margin (%) 54.1 52.9 53.6 54.1

EBITDA margin (%) 24.8 24.7 25.2 26.2

Net profit margin (%) 17.0 17.0 18.2 19.4

Revenue growth (% YoY) 1.4 18.2 13.0 9.2

EBITDA growth (% YoY) 11.0 17.9 15.3 13.5

Adj. profit growth (%) 11.6 18.3 20.9 16.3

Assumptions (%) Year to March FY20A FY21E FY22E FY23E

GDP (YoY %) 4.8 (6.0) 7.0 6.0

Repo rate (%) 4.4 3.5 3.5 4.0

USD/INR (average) 70.7 75.0 73.0 72.0

Volume gr. (overall) 2.0 1.0 7.0 7.0

Pricing gr. (overall) (0.6) 1.0 6.0 2.2

COGS % of sales (con) 45.9 47.1 46.4 45.9

Staff cost (% of rev) 4.7 5.1 4.9 4.6

Yield on cash 9.9 5.7 12.0 12.0

Dep (% of gross block) 14.6 12.7 10.8 10.5

Valuation Metrics Year to March FY20A FY21E FY22E FY23E

Diluted P/E (x) 78.2 71.8 59.4 51.1

Price/BV (x) 64.3 12.0 11.8 11.5

EV/EBITDA (x) 57.6 48.8 42.2 37.0

Dividend yield (%) 1.1 1.7 1.5 1.8

Source: Company and Edelweiss estimates

Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E

Share capital 2,165 2,350 2,350 2,350

Reserves 80,130 4,74,390 4,84,063 4,95,312

Shareholders funds 82,295 4,76,740 4,86,413 4,97,662

Minority interest 170 200 200 200

Borrowings 0 0 0 0

Trade payables 75,350 88,020 94,574 1,07,215

Other liabs & prov 14,980 82,720 82,720 82,720

Total liabilities 1,98,695 6,87,400 7,03,626 7,27,517

Net block 49,600 61,160 60,352 56,900

Intangible assets 5,190 4,53,270 4,53,270 4,53,270

Capital WIP 5,970 7,450 4,500 4,500

Total fixed assets 60,760 5,21,880 5,18,122 5,14,670

Non current inv 20 20 20 20

Cash/cash equivalent 63,665 71,780 90,518 1,12,574

Sundry debtors 11,490 17,580 17,461 19,059

Loans & advances 16,580 14,390 14,390 14,390

Other assets 33,860 40,930 42,294 45,984

Total assets 1,98,695 6,87,400 7,03,626 7,27,517

Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E

Reported profit 97,230 1,16,720 1,30,710 1,50,400

Add: Depreciation 10,020 11,340 10,808 11,452

Interest (net of tax) 1,180 1,170 1,150 1,150

Others (60) (10) 11,958 12,602

Less: Changes in WC 4,110 (1,010) 5,308 7,354

Operating cash flow 76,230 91,630 1,13,991 1,32,455

Less: Capex (8,620) 21,100 7,050 8,000

Free cash flow 84,850 70,530 1,06,941 1,24,455

Key Ratios Year to March FY20A FY21E FY22E FY23E

RoE (%) 86.5 29.5 20.1 22.9

RoCE (%) 116.9 39.2 27.4 30.8

Inventory days 53 52 54 53

Receivable days 14 11 12 11

Payable days 147 135 135 138

Working cap (% sales) 8.3 7.3 9.0 10.8

Gross debt/equity (x) 0 0 0 0

Net debt/equity (x) (0.8) (0.2) (0.2) (0.2)

Interest coverage (x) 75.1 90.2 107.2 122.3

Valuation Drivers Year to March FY20A FY21E FY22E FY23E

EPS growth (%) 11.6 9.0 20.9 16.3

RoE (%) 86.5 29.5 20.1 22.9

EBITDA growth (%) 11.0 17.9 15.3 13.5

Payout ratio (%) 81.4 115.5 90.0 90.0


HINDUSTAN UNILEVER

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3

HUL smart refill initiative

What is the initiative?

Hindustan Unilever has launched its first ‘Smart Fill’ machine, an in-store vending

model for its home care products with the aim to reuse, reduce and recycle plastic.

This initiative offers consumers an innovative option to reuse their plastic bottles by

refilling HUL products such as Surf Excel, Comfort and Vim through the use of a smart

‘refillery’. We see this step as interesting as it will help address challenges of

managing plastic packaging waste. Besides, consumers will have a more active

connect with HUL’s brands since it provides an opportunity to contribute in

managing plastic waste, not to mention the greater affordability. We look forward

to seeing more additions, especially in body wash, hand wash and hair care products.

How does it work?

To access products from the Smart Fill machine, consumers can either use their old

empty bottles or purchase a Smart Fill bottle from the store at a nominal price. As

an incentive, consumers are being offered INR30 off on the MRP or effective price

at the store if they get their own bottle and INR15 off to those that purchase the

Smart Fill bottle.

What are the products I can refill?

The flagship brands that consumers can avail these benefits on include Surf Excel

liquid for Top Load and Front Load washing machines, Comfort Fabric Conditioner

and Vim Dishwash Liquid Gel. We look forward to seeing more brand additions,

especially in body wash, hand wash and hair care products.

Where can I find this today?

HUL’s three-pronged consumer-centric approach of ‘Reuse, Refill and Reward’ aims

to build mass public awareness that changes the way plastic is viewed, used and

managed. Presently the company has launched a pilot in select locations. The

company aims to use learnings from this pilot to create a scalable refill business

model in partnership with prominent retailers and trade outlets.

A vending machine installed at Reliance Smart Acme Mall in Mumbai offers

consumers a refilling option. Damodar Mall, CEO Grocery Retail at Reliance, said,

“We are excited about this initiative with HUL. Reuse & Recycle is a natural instinct

in Indian families. A unique feature of most urban neighbourhoods is a micro-

entrepreneur shop that buys household material for recycling. These societal habits

must find their modern expressions, too. HUL Refillery is one such smart effort. Our

shoppers at Smart Superstore already love it. We are looking forward to taking the

idea to more urban centres, along with the HUL Team.”

And we too look forward to seeing more additions, especially in body wash, hand

wash and hair care products (P&G has this for its personal care products in some

markets). Parent Unilever has also rolled this out in some key markets.

HINDUSTAN UNILEVER



HUL at the forefront of ESG

HUL has committed to ensuring that 100% of the company’s plastic packaging is

reusable, recyclable, or compostable by 2025. It has further committed to halving

use of virgin plastic by reducing the absolute use of plastic packaging and

accelerating use of recycled plastic. The company is also committed to collecting and

processing more plastic packaging waste than the plastic packaging it uses. HUL will

also enable collection and processing of over 100,000 tons of post-consumer plastic

waste through its partners across the country.

Is any other FMCG company in India trying out something similar?

In India, the closest we have to this are refill packets (which also use plastic), but no

major FMCG company has come up with a vending machine format like the one HUL

has.

HUL smart fill machine

Source: Company


HINDUSTAN UNILEVER


Initiatives around the world

The following are similar initiatives around the world and how they fared.

Unilever’s pilot around the world

Let’s begin with the initiative undertaken in Europe by HUL’s parent company.

Unilever partners at the Ellen MacArthur Foundation have outlined four models for

refillable and reusable consumer products that the company agrees has very strong

potential. All four approaches are informing the pilot projects the company runs

time to time, including the ones in Europe that were conducted in 2020.

The company is also exploring business-to-business models through Unilever Food

Solutions, which provides products for the hospitality sector. The following are the

four models Unilever has come up with:

Refill at home: where consumers reuse their packaging by refilling at home, for

example with a concentrated version that is diluted with water

Refill on the go: where shoppers refill their containers through dispensing

systems in stores

Return from home: where consumers can arrange for packaging to be collected

from their home and refilled

Return on the go: where consumers return packaging at a drop-off point, and it

is collected and refilled by manufacturers

Business-to-business refills and returns: where hospitality sector businesses can

order large refills for professional kitchens

Here are the list of major pilots conducted so far and the learnings thereof:

Intelligent refill by app: Shoppers in Chile can now top up their OMO and Quix

cleaning and laundry bottles with the swipe of a screen. By using an app developed

by Chilean social enterprise Algramo, consumers can order refills, which are

delivered to their door by electric tricycles. They simply dispense the amount they

need into reusable containers, and make a cash-free payment for their customised

order.

The model thrived during 2020, as e-commerce shopping rates have increased. It

has had a good repeat rate, and more than 8,500 households have signed up. The

major learning here was that technology is a key enabler for some reuse models,

and that using an app allows us to analyse progress, make adjustments and scale up

quickly.

Walmart in store dispensers – Circular model: Similar to their launch in India now,

shoppers can now buy long-lasting aluminium Sedal bottles at ten Walmart stores in

Mexico City and refill them for less than the cost of a Sedal standard plastic bottle.

It’s a move that provides an affordable solution, and helps to create an end-to-end

circular economy model.

Working together closely, Walmart and Sedal teams took the partnership from an

idea to an on-shelf reality in just 90 days. Expansion was put on hold this year due

to the covid-19 pandemic. But the brand aims to scale up this approach to reach 500

stores nationwide during 2021, adding more products to refill stations.

Refill packs: Since Cif launched ultra-concentrated refills for its Power & Shine spray

bottles last year, the brand has saved over 170 tonnes of plastic. Refills are now on

HINDUSTAN UNILEVER



sale across ten markets in Europe, Canada and Australia The refills require 75% less

plastic than ordinary packs, and are fully recyclable once wrappers have been

removed.

By diluting at home, 97% less water is transported, resulting in 80% fewer trucks

needed to transport the product. Better still, the 10x concentrated formula allows

consumers to reuse a Power & Shine bottle again and again. A ‘bottle for life’ made

from 100% recycled plastic is also available via e-commerce. This is similar to the

some hand wash refill packs we have in India today.

In-store dispenser in Bogota: Despite the ongoing challenges of covid-19, Unilever

launched its first refill pilot in Graneco stores in Bogota in August 2020. Once

shoppers had bought a bottle of one of four home care brands, they could then refill

the same container – in any available size – for less than the standard price of a new

pack. The pilot has already led to an increase in sales.

Unilever learnt that consumers are more likely to spill product when refilling smaller

pack sizes, so the company will be exploring whether they should stick to larger

bottles only in the future. Shoppers also told the company that it wasn’t immediately

clear how to use the refill dispenser. They often needed assistance from shop staff.

A refined version of this is what has been launched in India today.

Loop partnership: In 2019, Unilever began its trial with Loop – a business which

delivers products in returnable packaging to consumers at home, through an online

subscription model. Unilever continued to grow its partnership with Loop during

2020, bringing new brands on board, and entering the UK market.

Four Unilever brands are now available on Loop across three markets. Unilever plans

to add new markets and brands in 2021. We expect that with greater collaboration

and use, both from consumers and other businesses, we can see the platform scaling

up. Integrating Loop with retailers’ online platforms will also support the model to

scale up. We have covered more about Loop below.

Unilever refill machine initiative abroad

Source: Company


HINDUSTAN UNILEVER


Unilever partners with Loop

Source: Company

Loop – A circular reuse model

One of the most famous cases is that of a start-up called Loop, which made this

concept very popular. A new initiative by a small company has compelled more than

two dozen of the world’s biggest brands to begin testing reusable packaging. Loop,

launched in 2019 at the World Economic Forum in Davos, Switzerland, has amassed

a blue-chip roster of companies, all of which are piloting a new system of high-

quality packaging that can be returned and refilled again and again. In essence, it

changes the ownership model of packaging from consumer to producer.

Loop’s launch is the product of more than a year’s work by TerraCycle, a New Jersey-

based company that made a name for itself by turning hard-to-recycle waste (think

juice boxes, coffee capsules, plastic gloves and cigarette filters) into new products.

Along the way, the company, founded in 2001, has partnered major consumer

brands, retailers, manufacturers, municipalities and small businesses in more than

20 countries.

Loop is the natural progression of that model, as well as the corporate relationships

TerraCycle developed over the years. Its Loop partners include Procter & Gamble,

Nestlé, PepsiCo, Unilever, Mars, Clorox, Coca-Cola, Mondelēz, Danone and a dozen

or so smaller brands. European retailer Carrefour, logistics major UPS and resource

management company Suez are also engaged in the system.

So how does Loop work?

Loop was designed to be an e-commerce play, at least to begin with. Consumers can

order goods from the Loop website or that of a partner and have them delivered like

traditional products ordered online. But there’s a twist: customers pay a small

deposit for a package that has been designed for 100 or more use-cycles. When the

container is empty, customers place it in a specially designed tote for pickup or, in

some cases, can bring it to a retailer. They can choose whether they want that

product replenished; if not, their deposit is returned or credited to their account.

The empties are sent to a facility where they are washed and refilled.

The entire process is handled by TerraCycle, from sale and delivery to package return

and cleaning. In effect, TerraCycle is the online retailer, buying wholesale and selling

retail. The package remains the property of the brand.

Eventually, Loop will expand to include brick-and-mortar retailers. The company has

already signed on some big retailers in the US and Europe as of 2021.

HINDUSTAN UNILEVER



How Loop works – A step-by-step illustration

Source: Company, Edelweiss Research


HINDUSTAN UNILEVER


P&G enters sustainability race

The What? Following the launch of Unilever’s largest refill pilot in Europe to date,

P&G Beauty shared its latest packaging innovation immediately thereafter in 2020.

What are the Details? P&G is launching a refill system for its leading beauty brands

– Head & Shoulders, Pantene, Herbal Essences and Aussie – comprising a reusable

100 percent aluminium bottle and recyclable refill pouch made using 60 percent less

plastic.

Artur Litarowicz, Senior Vice President and General Manager of Hair Care for P&G

Europe said, “We need to start turning the tide on the plastic waste crisis and there

is no time to waste when it comes to protecting our planet. That is why I’m thrilled

to announce a new packaging innovation called the ‘good refill system’. This will

allow consumers to have the product they love in a beautiful, reusable aluminium

bottle and refill pouches. This will be launched across Head & Shoulders, Pantene,

Herbal Essences and Aussie.

We know this is just the start. There is so much more to do, and I am passionate

about P&G Beauty being a force for good across Europe as we step towards

achieving our 2030 Responsible Beauty goals at pace.”

The Why? P&G’s Chief Sustainability Officer Virginie Helias on why they chose the

initiative, said, “We have committed to enable and inspire responsible consumption

through innovation on our product and packaging. Our leading beauty brands in

Europe touch millions of lives. This new packaging innovation will contribute to

making the reuse of packaging irresistible, while enabling a reduction of virgin plastic

as per P&G’s Ambition 2030 commitment. It’s no longer about if or what we can do,

but how quickly we can do it – the window is now for embracing new sustainable

lifestyles.”

P&G refillable products

Source: Company

HINDUSTAN UNILEVER



Outlook and valuation: On a firm footing; maintain ‘BUY’

We remain positive on HUL's ability to outgrow the market, as well as its pricing

power underpinned by distribution expansion, deepening direct reach and product

innovation initiatives. The ongoing demand shift from the unorganised segment to

organised should result in additional gains for the company. The merger of GSK

portfolio with HUL has begun to yield revenue delta; we believe the larger story will

be innovation and NPDs in HFD and allied categories.

Cost savings and mix improvement are bound to spur margin structurally. Although

inflationary raw materials may continue to impact gross margin in the near term, we

expect cost-saving initiatives such as zero-based budgeting, efficiency in ad spends,

changes in route-to-market, etc. to counteract such pressures. The acquisition of

GSK’s portfolio will also aid overall margin expansion.

We expect premiumisation to sustain and, hence, expect better earnings growth.

Retain ‘BUY/SO’ with a TP of INR2,900. The stock is trading at 51.1x FY23E EPS.

One-year PE chart

Source: Edelweiss Research

500

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HINDUSTAN UNILEVER


Company Description

HUL, the largest FMCG player in India, was formed by merging three subsidiaries of

Unilever in 1956. HUL’s portfolio of products covers a wide spectrum including

soaps, detergents, skin creams, shampoos, toothpastes, tea, coffee, packaged foods

and branded atta.

Powerful brands and an envious distribution network are its primary strengths. The

company operates through segments—home care, personal care, foods &

refreshments, and other operations.

Investment Theme

HUL is a play on consumption growth in India. The company has proved its ability to

effect price hikes and ability to grow ahead of market, which, combined with

improved outlook for S&D and personal care, and strong growth in processed foods

and beverages, boosts our positive outlook on the company. HUL has strongly

entered the naturals category and termed it a mega trend. HUL's acquisition of GSK

Consumer's HFD portfolio will also aid in overall revenue momentum. We appreciate

its revenue growth from a medium to long term perspective. Though commodity

prices have started to inch up, we are not worried since HUL has sufficient pricing

power to offset any pressure likely to arise at the gross margin level. We expect

higher investment in A&P to support brand equity and counter pick up in

competitive intensity (especially from regional players). With overall demand

looking buoyant, we expect HUL to be key beneficiary.

Key Risks

INR depreciation impacts price of imported raw materials.

Ad spends likely to spike due to increased competition from regional players.

Maintaining market share will also be a challenge for HUL.

The price war in HUL’s popular segments with new entrants entering the fray

could hit the company had.

HINDUSTAN UNILEVER



Additional Data

Management

MD and Chairman Mr. Sanjiv Mehta

CFO Mr. Ritesh Tiwari

Exec Director Mr. Dev Bajpai

Exec Director Mr. Willem Uijen

Auditor BSR & Co. LLP

Holdings – Top 10* % Holding % Holding

Nordea Bank 0.28 Icici Prudentia 0.55

Vanguard Group 1.29 Standard Life A 0.42

Blackrock 1.25 Norges Bank 0.41

Sbi Funds Manag 0.90 Uti Asset Manag 0.39

Jp Morgan Chase 0.62 Kotak Mahindra 0.30

*Latest public data

Recent Company Research Date Title Price Reco

29-Apr-21 All round strong show; Result Update

2,408 Buy

22-Mar-21 Concerns overdone; outlook affirmative; Company Update

2,252 Buy

03-Mar-21 Clearing the air: Decent recovery all ov; Company Update

2,163 Buy

Recent Sector Research Date Name of Co./Sector Title

06-Jul-21 Consumer Staples Q1FY22 : Six weeks of aberration; Sector Update

29-Jun-21 Tata Consumer Products

From sips to gulps: Beefing up execution; Company Update

17-Jun-21 Consumer Staples Fortune at bottom of pyramid; Sector Update

Rating Interpretation

Source: Bloomberg, Edelweiss research

Daily Volume

Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage

Buy Hold Reduce Total

Rating Distribution* 168 55 19 243

>50bn >10bn and <50bn <10bn Total

Market Cap (INR) 215 41 3 259

*1 stocks under review

Rating Rationale

Rating Expected absolute returns over 12 months

Buy: >15%

Hold: >15% and <-5%

Reduce: <-5%

TP1,767

TP2,020

TP2,288

TP2,620

1500

1725

1950

2175

2400

2625

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HUVR IN Equity Buy Hold Reduce0

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80

120

160

200

Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21

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HINDUSTAN UNILEVER


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KEY DATA Upping smartness and ESG quotient

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