Hindustan Unilever - Cost structure management surprises positively - Phillip Capital

HUL reported Q3FY14 revenues were in-line with our estimates but the company surprised positively on gross and EBIDTA margins. While the underlying volume growth at 4% YoY (in spite of favourable base) continued to remain uninspiring but the company is showing resilience in a very tough operating environment. The company managed its cost structure better than our expectations and we believe HUL holds this sustainable advantage over peers on account of its global buying efficiencies. We upgrade the stock to Neutral as we could see improvement in operating and earnings performance in the forthcoming quarters. The key takeaways of the results are as follows:

Volume growth continues to remain sluggish but pricing in-line: The domestic volume of 4% YoY continued to remain sluggish but the overall value growth at 10% with pricing growth of 6% was reasonable considering the challenging environment. Soaps and Detergents grew by 7% YoY, Personal care by 12.4% YoY, Beverages by 7.2% YoY and Processed foods by 12.9% YoY. The overall sluggishness in the volume growth was on account of higher pricing component in the detergents category. In the soaps growth continued to be led by volume while in laundry growth was primarily driven by pricing. The company has re-launched wheel brand with improved formulation. In the personal care category growth Skin care growth was reasonable in a slowing market. Hair care sustained string momentum with double digit volume led growth. Oral care also registered robust double digit growth in a highly competitive environment. In beverages tea registered double digit growth while coffee had a sluggish quarter.

EBIDTA margins surprise positively: The EBIDTA grew by 12.7% YoY to Rs 12.26bn while the margin was higher than expectations at 17% (our exp 16.5%) on account of higher-than-expected gross margins at 46.8% (our exp at 46%) and lower advertising revenue expenses. Input cost inflation was impacted by rupee depreciation but it was managed by pricing action and unwinding of promotion activities. Even in the uncertain inflationary media environment, the company surprised positively by lower-than-expected advertising expenses growth. We attribute the surprise to companyÆs scale and buying efficiencies in both raw materials and media.

EBIT margins better than expectations across categories: The soaps and detergents and personal care categories both reported better than expected margins of 13.4% and 28.3% which was better than our expectations by 100bps and 30bps respectively.

Revise estimates; upgrade recommendation: We have revised our estimates upwards marginally taking into consideration the better than expected cost management and reasonable operating performance in a highly challenging environment. We upgrade the stock to Neutral considering the time and price correction in the last 6 months while improving operating performance further cushions our stance. We value the company at 30x FY15E earnings at Rs 560 which implies a limited downside of 3% from the current levels.

Source : Equity Bulls

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