Hindustan Unilever - 3QFY17 Result Update - Besides Demonetisation, Price Hikes Impedes Performance - Reliance Securities

Hindustan Unilever's (HUL) sales dipped by 1.2% yoy to Rs75.1bn in 3QFY17, while volume fell by 4% in 3QFY17. EBITDA & PAT (before exceptional items) dipped by 5.2% yoy & 10.2% yoy to Rs13.6bn & Rs9.2bn, respectively. Considering the impact of demonetisation on 3Q numbers, we have cut our earnings estimates by 4% and expect revenue and earnings to report 7% & 8% CAGR through FY16-18. At 38.6x FY18E earnings, there is limited upside potential, with no positive growth trigger in sight. We maintain our HOLD recommendation on the stock with revised Target Price of Rs857.

Management Commentary on Demonetisation

HUL's management stated that post demonetisation, the purchase basket size of consumer reduced leading to higher store visits, although premiumization as a trend continued. While most trade channels have normalised, large rural wholesale channel continues to be under stress. Southern & Western markets were least impacted due to better penetration of banking channels while Northern & Central markets were most impacted. The Management added that it would continue to focus on product innovations and expand direct distribution network apart from adopting temporary measures i.e. extended credit to trade.

Price Hikes Hurt Volumes

HUL's quarterly revenue growth was impacted due to reduced trade pipeline and lower consumer off-take. While Home Care segment grew by 1% yoy to Rs26.9bn, Personal Products segment suffered the most with revenues dropping by 2.7% yoy to Rs39.8bn. Decline in Personal Products is attributable to calibrated price hikes undertaken by HUL to counter commodity inflation. Foods business remained flat at Rs2.8bn, while Refreshment category grew by 8% yoy to Rs11.6bn. Overall gross margins for 3QFY17 fell by 60bps to 50.2% on the back of sharp rise in palm and crude oil prices. Average PFAD prices surged 65% yoy, while crude oil prices rose by 20% yoy in 3QFY17.

Among new products, HUL saw good response to Baby Dove and Fair & Lovely ayurvedic care. It also strengthened its presence in Naturals platform by launching Lever Ayush in South India across channels in categories i.e. Skin Care, Soaps, Hair Care & Toothpaste.

Outlook & Valuation

We expect HUL to post revenues of Rs323.5bn & Rs359.5bn and net profit of Rs42.8bn & Rs48.3bn in FY17E & FY18E, respectively. Based on EPS of Rs22.3 in FY18, the stock currently trades at 38.6x earnings, which prevents any major upside from the current levels. We maintain our HOLD recommendation on the stock with revised Target Price of Rs857, based on 35x Dec'18 earnings.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.869.1 as compared to the previous close of Rs. 860.95. The total number of shares traded during the day was 51623 in over 2303 trades.

The stock hit an intraday high of Rs. 870 and intraday low of 856.45. The net turnover during the day was Rs. 44645079.

Source : Equity Bulls

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