June 7, 2019 1

Rating: HOLD | CMP: Rs1,831 | TP: Rs1,764

“The Juggernaut rolls on”

Quick Pointers:

HUL is not looking at near term blip as a sustainable trend

HUL continues to have unrelenting focus on categories of future given as they

have just 3-26% penetration and 2x growth than company average

Premiumisation is the Mantra across categories as HUL has 30% higher share

in premium segments

HUL’s digital initiatives have enabled 40% faster pace of innovations, 30%

lower inventory but 80% higher assortments

HUL has transformed Laundry segment led by Surf Excel easy wash with 3.6x

profits in past 6 years

Full benefits of GST are yet to play out due to patchy implementation. The cost

savings benefits will continue to accrue over next 2-3 years

Unlike last 4 years of 570bps margin expansion, incremental gains will accrue

at a relatively moderate pace

HUL’s Annual Investor Meet reinforced our positive stance on long term

growth potential and business strategy of the company. HUL continues to

ride on twin engines of new category creation and innovation in existing

segments to remain ahead of the competition. We believe sustained

investment in categories like Liquid Detergents, face wash, Hand wash,

Coffee, Body Lotion hair conditioners and soups etc. will create long term

drivers given higher market share, strong right to win and technology and

brand head start over competition. We believe HUL’s Premiumisation drive

in key categories like Laundry, personal wash and Cosmetics will go a long

way in increasing growth given presence of huge mass segment in these

categories.

Glaxo Consumer acquisition is likely to add to strength of its foods portfolio

given low penetration, strong cost saving plans of HUL and benefits of 3x

bigger distribution. We believe HUL’s foods portfolio riding on Horlicks, Walls

and Tea can enable sustained growth in coming years.

We believe that current slowdown in demand is temporary and we expect

recovery to start materialize from 2Q given expectations of normal

monsoons. Despite incremental gains from GST, digitization and

Premiumisation, we estimate only 80bps margin expansion over FY19-21.

We estimate 14% PAT CAGR over FY19-21 (excluding Glaxo merger). We

estimate pro-forma EPS (including GSK acquisition) of Rs38.2 for FY21 and

value the stock at 46x thus arriving at target price of Rs1764. We expect back

ended returns given lifetime high valuations. Hold.

Hindustan Unilever (HUVR IN)

June 7, 2019

Analyst Meet Update

Change in Estimates | Target | Reco

Change in Estimates

Current Previous

FY20E FY21E FY20E FY21E

Rating HOLD HOLD

Target Price 1,764 1,764

Sales (Rs. m) 422,440 470,654 422,440 470,654

% Chng. - -

EBITDA (Rs. m) 97,272 110,349 97,272 110,349

% Chng. - -

EPS (Rs.) 31.2 35.2 31.2 35.2

% Chng. - -

Key Financials

FY18 FY19 FY20E FY21E

Sales (Rs. bn) 345 382 422 471

EBITDA (Rs. bn) 73 86 97 110

Margin (%) 21.1 22.6 23.0 23.4

PAT (Rs. bn) 53 61 67 76

EPS (Rs.) 24.5 28.1 31.2 35.2

Gr. (%) 24.7 14.7 10.8 12.9

DPS (Rs.) 18.0 22.0 25.1 27.9

Yield (%) 1.0 1.2 1.4 1.5

RoE (%) 78.1 82.5 86.9 94.9

RoCE (%) 100.2 110.1 118.2 129.7

EV/Sales (x) 11.3 10.2 9.2 8.3

EV/EBITDA (x) 53.5 45.0 40.0 35.3

PE (x) 74.6 65.0 58.7 52.0

P/BV (x) 55.9 51.6 50.4 48.1

Key Data HLL.BO | HUVR IN

52-W High / Low Rs.1,871 / Rs.1,477

Sensex / Nifty 39,616 / 11,871

Market Cap Rs.3,965bn/ $ 57,078m

Shares Outstanding 2,165m

3M Avg. Daily Value Rs.5264.19m

Shareholding Pattern (%)

Promoter’s 67.19

Foreign 11.83

Domestic Institution 7.03

Public & Others 13.95

Promoter Pledge (Rs bn) -

Stock Performance (%)

1M 6M 12M

Absolute 7.9 0.4 14.3

Relative 4.3 (9.6) 2.3

Amnish Aggarwal

amnishaggarwal@plindia.com | 91-22-66322233

Nishita Doshi

nishitadoshi@plindia.com | 91-22-66322381

Hindustan Unilever

June 7, 2019 2

HUL is nurturing low penetration categories to drive long term growth

Source: Company, PL

HUL is building a strong Naturals portfolio across segments

Source: Company, PL

HUL’s premium portfolio is 30% more than market with higher share

Source: Company, PL

Hindustan Unilever

June 7, 2019 3

Digital Initiatives are driving innovation and market orientation for growth

Source: Company, PL

Personal care segment focusing on naturals range and Male grooming portfolio

Source: Company, PL

Hindustan Unilever

June 7, 2019 4

Hair care Segment has grown at 11% CAGR since 2013, increased market share 560bps

Source: Company, PL

Color Cosmetics led by lakme has grown sales at 15% CAGR over FY13-19

Source: Company, PL

Hindustan Unilever

June 7, 2019 5

Home care focused on driving Premiumisation, New channels and innovations

Source: Company, PL

Laundry has seen 10% CAGR in sales and 3.6x profits over FY13-19

Source: Company, PL

Hindustan Unilever

June 7, 2019 6

HUL is making strong gains in Mid and Premium segments in laundry

Source: Company, PL

HUL has sphere headed expansion of Premium segment in Detergents led by Surf Excel Easy Wash

Source: Company, PL

Hindustan Unilever

June 7, 2019 7

Food Strategy involves growing core categories and select acquisitions to fill gaps

Source: Company, PL

Tea has grown sales at 10% CAGR and gained 230bps share over FY13-19, most profitable tea operation globally

Source: Company, PL

Hindustan Unilever

June 7, 2019 8

Urban Tea share 2.5x, Overall portfolio health has improved in last 3 years

Source: Company, PL

Ice Creams has seen 6x Towns expansion, Adityaa enabled BOP expansion and Oreo in premium

Source: Company, PL

Hindustan Unilever

June 7, 2019 9

Comparable FMCG sales up 9%

8.0

6.0

10.0

17.0 16.0 16.0

12.0 13.0

9.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Source: Company, PL

Volumes up 7% on moderation in rural sales

4.0

0.0

4.0

11.0 11.0 12.0

10.0 10.0

7.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Source: Company, PL

Ad spends decline 130bps QoQ

10.4 10.6

12.3

12.9

11.8 12.2 12.0

12.4

11.1

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Source: Company, PL

GM down 30bps; EBITDA margins up 80bps

51.0 52.1 52.7 54.5 52.6 54.0 52.0 53.8 52.3

20.1 21.9 20.2 19.6 22.5 23.7 21.9 21.4 23.3

10.0

20.0

30.0

40.0

50.0

60.0Q

4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Gross Margins (%) EBITDA Margins (%) (RHS)

Source: Company, PL

PFAD prices down 7.9% YoY and up 3% QoQ

-4.4%

6.7%28.7%

69.7%

30.3%

3.1%2.7%

-6.9%-15.3%-13.7%-14.6%

-32.2%

-21.4%

-7.9%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

Mar-

16

Jun-1

6

Sep-1

6

Dec-

16

Mar-

17

Jun-1

7

Sep-1

7

Dec-

17

Mar-

18

Jun-1

8

Sep-1

8

Dec-

18

Mar-

19

Jun-1

9

YoY QoQ

Source: Company, PL

LAB prices fell as crude prices corrected

114.1

86.1

95.1

123

101

60

70

80

90

100

110

120

130

140

Aug-1

3N

ov-

13F

eb-1

4M

ay-

14

Aug-1

4N

ov-

14F

eb-1

5M

ay-

15

Aug-1

5N

ov-

15F

eb-1

6M

ay-

16

Aug-1

6N

ov-

16F

eb-1

7M

ay-

17

Aug-1

7N

ov-

17F

eb-1

8M

ay-

18

Aug-1

8N

ov-

18F

eb-1

9

(Rs

/Kg

)

Source: Company, PL

Hindustan Unilever

June 7, 2019 10

Acquisition to be 9-9.5% margin accretive for HUVR

Y/e March (Rs mn) FY21E FY22E

Adj. PAT

HUVR 76,401 87,385

GSK 13,524 16,036

Total Adj. PAT 89,925 1,03,421

Equity shares

Existing HUVR shares 2160.0

Existing GSK shares 42.1

Additional share issued on swap (4.39sh:1sh) 184.6

Total shares after amalgamation 2344.6

New Merged EPS 38.35 44.11

Existing EPS 35.2 40.3

% Change 8.94% 9.54%

Source: Company, PL

Hindustan Unilever

June 7, 2019 11

Financials

Income Statement (Rs m)

Y/e Mar FY18 FY19 FY20E FY21E

Net Revenues 345,250 382,240 422,440 470,654

YoY gr. (%) 8.3 10.7 10.5 11.4

Cost of Goods Sold 162,320 179,600 197,522 219,519

Gross Profit 182,930 202,640 224,918 251,135

Margin (%) 53.0 53.0 53.2 53.4

Employee Cost 17,450 17,470 21,324 24,284

Other Expenses 940 930 1,251 1,393

EBITDA 72,760 86,370 97,272 110,349

YoY gr. (%) 20.3 18.7 12.6 13.4

Margin (%) 21.1 22.6 23.0 23.4

Depreciation and Amortization 4,780 5,240 5,593 5,943

EBIT 67,980 81,130 91,679 104,406

Margin (%) 19.7 21.2 21.7 22.2

Net Interest 200 280 215 215

Other Income 5,690 6,640 6,841 7,474

Profit Before Tax 73,470 87,490 98,306 111,664

Margin (%) 21.3 22.9 23.3 23.7

Total Tax 20,480 26,690 30,917 35,264

Effective tax rate (%) 27.9 30.5 31.5 31.6

Profit after tax 52,990 60,800 67,388 76,401

Minority interest - - - -

Share Profit from Associate - - - -

Adjusted PAT 52,990 60,800 67,388 76,401

YoY gr. (%) 24.7 14.7 10.8 13.4

Margin (%) 15.3 15.9 16.0 16.2

Extra Ord. Income / (Exp) (620) (440) (500) 500

Reported PAT 52,370 60,360 66,888 76,901

YoY gr. (%) 16.6 15.3 10.8 15.0

Margin (%) 15.2 15.8 15.8 16.3

Other Comprehensive Income (120) (30) (200) (200)

Total Comprehensive Income 52,250 60,330 66,688 76,701

Equity Shares O/s (m) 2,160 2,160 2,160 2,170

EPS (Rs) 24.5 28.1 31.2 35.2

Source: Company Data, PL Research

Balance Sheet Abstract (Rs m)

Y/e Mar FY18 FY19 FY20E FY21E

Non-Current Assets

Gross Block 73,614 80,504 85,504 90,504

Tangibles 66,720 73,162 78,162 83,162

Intangibles 6,894 7,342 7,342 7,342

Acc: Dep / Amortization 32,194 37,434 43,027 48,970

Tangibles 28,960 34,092 39,574 45,408

Intangibles 3,234 3,342 3,452 3,562

Net fixed assets 41,420 43,070 42,477 41,534

Tangibles 37,760 39,070 38,588 37,754

Intangibles 3,660 4,000 3,890 3,780

Capital Work In Progress 4,300 3,730 2,500 2,600

Goodwill - 360 360 360

Non-Current Investments 6,000 6,630 6,633 6,635

Net Deferred tax assets 2,550 3,390 3,593 3,809

Other Non-Current Assets 5,170 7,730 7,895 8,089

Current Assets

Investments 33,840 26,930 30,930 37,130

Inventories 23,590 24,220 26,810 29,265

Trade receivables 11,470 16,730 17,132 19,086

Cash & Bank Balance 28,440 36,880 36,345 41,563

Other Current Assets 6,260 3,520 3,948 4,399

Total Assets 171,490 178,650 188,010 202,666

Equity

Equity Share Capital 2,160 2,160 2,160 2,170

Other Equity 68,590 74,430 76,316 80,400

Total Networth 70,750 76,590 78,476 82,570

Non-Current Liabilities

Long Term borrowings - - - -

Provisions 7,720 10,490 9,479 10,591

Other non current liabilities 1,670 1,870 2,010 2,161

Current Liabilities

ST Debt / Current of LT Debt - - - -

Trade payables 70,130 70,700 77,115 84,199

Other current liabilities 16,230 12,830 14,293 15,948

Total Equity & Liabilities 171,490 178,650 188,010 202,666

Source: Company Data, PL Research

Hindustan Unilever

June 7, 2019 12

Cash Flow (Rs m)

Y/e Mar FY18 FY19 FY20E FY21E Year

PBT 73,470 87,490 98,306 111,664

Add. Depreciation 4,370 5,240 5,593 5,943

Add. Interest - - - -

Less Financial Other Income - - - -

Add. Other (740) (470) (700) 300

Op. profit before WC changes 77,100 92,260 103,198 117,908

Net Changes-WC 7,600 (3,550) (536) 6,134

Direct tax (20,480) (26,690) (30,917) (35,264)

Net cash from Op. activities 64,220 62,020 71,745 88,778

Capital expenditures (7,820) (6,680) (3,770) (5,100)

Interest / Dividend Income - - - -

Others (10,870) 3,150 (2,443) (9,578)

Net Cash from Invt. activities (18,690) (3,530) (6,213) (14,678)

Issue of share cap. / premium 110 2,827 339 347

Debt changes 660 1,310 295 349

Dividend paid (46,510) (57,320) (65,140) (72,960)

Interest paid - - - -

Others - 3 (2) 6

Net cash from Fin. activities (45,740) (53,180) (64,508) (72,258)

Net change in cash (210) 5,310 1,024 1,843

Free Cash Flow 56,400 55,340 67,975 83,678

Source: Company Data, PL Research

Quarterly Financials (Rs m)

Y/e Mar Q1FY19 Q2FY19 Q3FY19 Q4FY19

Net Revenue 94,870 92,340 95,580 99,450

YoY gr. (%) 11.2 11.1 11.3 9.3

Raw Material Expenses 43,640 44,350 44,180 47,430

Gross Profit 51,230 47,990 51,400 52,020

Margin (%) 54.0 52.0 53.8 52.3

EBITDA 22,510 20,190 20,460 23,210

YoY gr. (%) 9.9 (10.3) 1.3 13.4

Margin (%) 23.7 21.9 21.4 23.3

Depreciation / Depletion 1,270 1,300 1,330 1,340

EBIT 21,240 18,890 19,130 21,870

Margin (%) 22.4 20.5 20.0 22.0

Net Interest 70 70 70 70

Other Income 1,350 3,050 1,060 1,180

Profit before Tax 22,520 21,870 20,120 22,980

Margin (%) 23.7 23.7 21.1 23.1

Total Tax 6,850 6,650 6,110 7,080

Effective tax rate (%) 30.4 30.4 30.4 30.8

Profit after Tax 15,670 15,220 14,010 15,900

Minority interest - - - -

Share Profit from Associates - - - -

Adjusted PAT 15,670 15,220 14,010 15,900

YoY gr. (%) 21.3 23.1 16.9 12.8

Margin (%) 16.5 16.5 14.7 16.0

Extra Ord. Income / (Exp) (380) 30 430 520

Reported PAT 15,290 15,250 14,440 16,420

YoY gr. (%) 18.3 23.4 8.9 21.5

Margin (%) 16.1 16.5 15.1 16.5

Other Comprehensive Income (10) - - (20)

Total Comprehensive Income 15,280 15,250 14,440 16,400

Avg. Shares O/s (m) 2,164 2,164 2,164 2,164

EPS (Rs) 7.2 7.0 6.5 7.3

Source: Company Data, PL Research

Key Financial Metrics

Y/e Mar FY18 FY19 FY20E FY21E

Per Share(Rs)

EPS 24.5 28.1 31.2 35.2

CEPS 26.7 30.6 33.8 37.9

BVPS 32.8 35.5 36.3 38.1

FCF 26.1 25.6 31.5 38.6

DPS 18.0 22.0 25.1 27.9

Return Ratio(%)

RoCE 100.2 110.1 118.2 129.7

ROIC 884.2 571.8 612.7 3,902.7

RoE 78.1 82.5 86.9 94.9

Balance Sheet

Net Debt : Equity (x) (0.9) (0.8) (0.9) (1.0)

Net Working Capital (Days) (37) (28) (29) (28)

Valuation(x)

PER 74.6 65.0 58.7 52.0

P/B 55.9 51.6 50.4 48.1

P/CEPS 68.5 59.9 54.2 48.2

EV/EBITDA 53.5 45.0 40.0 35.3

EV/Sales 11.3 10.2 9.2 8.3

Dividend Yield (%) 1.0 1.2 1.4 1.5

Source: Company Data, PL Research

Hindustan Unilever

June 7, 2019 13

Price Chart Recommendation History

No. Date Rating TP (Rs.) Share Price (Rs.)

1 10-Jul-18 Accumulate 1,627 1,644

2 16-Jul-18 Hold 1,703 1,751

3 5-Oct-18 Hold 1,703 1,574

4 12-Oct-18 Hold 1,703 1,570

5 3-Dec-18 Hold 1,880 1,826

6 7-Jan-19 Hold 1,880 1,785

7 17-Jan-19 Hold 1,874 1,752

8 5-Apr-19 Hold 1,854 1,659

9 3-May-19 Hold 1,764 1,694

Analyst Coverage Universe

Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)

1 Asian Paints Accumulate 1,433 1,386

2 Avenue Supermarts HOLD 1,228 1,251

3 Britannia Industries Accumulate 3,145 2,783

4 Colgate Palmolive Hold 1,220 1,180

5 Crompton Greaves Consumer Electricals BUY 284 218

6 Dabur India Hold 430 382

7 Emami Accumulate 475 358

8 Future Retail BUY 554 446

9 GlaxoSmithKline Consumer Healthcare Hold 8,139 6,996

10 Hindustan Unilever Hold 1,764 1,694

11 ITC BUY 369 289

12 Jubilant FoodWorks BUY 1,541 1,243

13 Kansai Nerolac Paints Accumulate 464 419

14 Marico Hold 351 340

15 Nestle India Accumulate 10,742 10,300

16 Pidilite Industries Accumulate 1,184 1,154

17 Titan Company BUY 1,264 1,132

18 Voltas HOLD 584 580

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%

Accumulate : 5% to 15%

Hold : +5% to -5%

Reduce : -5% to -15%

Sell : < -15%

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

787

1059

1331

1603

1875

Jun

- 1

6

Dec -

16

Jun

- 1

7

Dec -

17

Jun

- 1

8

Dec -

18

May -

19

(Rs)

Hindustan Unilever

June 7, 2019 14

ANALYST CERTIFICATION

(Indian Clients)

We/I, Mr. Amnish Aggarwal- MBA, CFA, Ms. Nishita Doshi- CA, B.Com Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

(US Clients)

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.

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