Annual Report Analysis

HUVRs volume and earnings growth in recent years has been far superior to that of its Consumer peers; the company is likely to continue to do well over the medium to long term as well. However, as the laggard Soaps segment could now see higher growth in terms of both volume and premiumization (hand washes, sanitizers, and body washes are at a much higher price index than soaps), the companys overall earnings growth Mr Mehta believes the Detergents and Home Care segments are also bound to do well amid the pandemic as well as later, albeit not at as accentuated a pace as Rising demand has been witnessed for immunity-building products and in-home consumption is also growing.

We pored over Hindustan Unilever's (HUVR) annual report for the financial year 2020. Below are the key excerpts from the same: Financial performance: FY20 was a challenging year with weakening macro-economic conditions, slowing FMCG market growth and COVID-19 led containment measures towards the end of the year. The second half of March saw an aggravated slowdown due to the COVID-19 outbreak, resultant containment measures by various states and finally a nation-wide lockdown. This had an adverse impact on the company's operations with supply chain breakage, manpower shortage and disruptions in transport offsetting the resilient growth levels achieved till Feb'2020. For the full year 2019-2020,...

Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods company with a heritage of over 80 years in India. With over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond's, Vaseline, Lakm, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall's and Pureit. HUL is a...

The GSK Group sold a 5.7% stake (13.37 crore shares) in Hindustan Unilever Limited (HUL) through multiple block deals in the open market at an average price of Rs. 1,902 per share. The stock has corrected by ~16% from its high and its currently trading at 48.1x its FY2022E earnings. GSK Group selling the stake has reduced supply overhang on the stock and the current valuations factors in a sluggish Q4 due to supply disruption caused by the nationwide lockdown in the fag-end of the quarter. We expect supply disruption to sustain in the coming months till the time the nation recovers from the pandemic situation. Thus, H1FY2021 would see HUL's sales significantly...

The GSK Group sold a 5.7% stake (13.37 crore shares) in Hindustan Unilever Limited (HUL) through multiple block deals in the open market at an average price of Rs. 1,902 per share. The stock has corrected by ~16% from its high and its currently trading at 48.1x its FY2022E earnings. GSK Group selling the stake has reduced supply overhang on the stock and the current valuations factors in a sluggish Q4 due to supply disruption caused by the nationwide lockdown in the fag-end of the quarter. We expect supply disruption to sustain in the coming months till the time the nation recovers from the pandemic situation. Thus, H1FY2021 would see HUL's sales significantly...

Company posted 9.4% declines in Q4FY20 revenue to Rs. 9,011cr, primarily impacted by breakage of supply chain (company plants now running at 70-75% utilization) and subdued demand amidst nationwide lockdown post mid-March. Company witnessed weaker revenue across all three segments with Beauty & Personal Care segment leading the declines (-13.5% YoY) while followed by Food & Refreshments (-6.7%) and Home Care (-4.3%). For FY20, company managed to achieve 1.5% YoY growth in...

Gross margin expanded by ~138 bps to 52.43% Y-o-Y on account of benign commodity prices. EBITDA decreased by 11% Y-o-Y to `2,065 crs in Q4FY20 led by higher ad spends, partly offset by lower staff costs and other expenses. Reported EBITDA margin stood at 22.9% as opposed to 23.9% in Q4FY19, contracted by 40 bps (160bps...

Hindustan Unilever (HUVR IN) performance was subdued and below our and consensus estimates on key headline numbers. Domestic sales growth came in lower at 9.4% YoY (2.5% our estimate) driven by a 7% decline in underlying volume growth (3% our estimate).

Hindustan Unilever Ltd (HUL), India's largest listed consumer packaged goods firm 70 bps contraction in operating profit margin (OPM) to 22.8%, dragged operating profit down by 12% to Rs 2100 crore. With other income standing higher by 134% to Rs 264 crore, the degrowth at PBIDT was restricted to 6% to Rs 2364 crore. After accounting for higher interest cost...

We believe the lockdown would impact Q1FY21 financials in even bigger way given first 20 days of April manufacturing was at extremely low utilisation. Further, we believe even in May, facilities would be working below optimum utilisation with continuance of labour and supply chain problems. On the demand front though, essentials (soaps, sanitisers, floor cleaners, personal hygiene products & tea) would continue to witness higher growth. However, certain discretionary categories (cosmetics, skin products, ice creams, etc.) would see subdued growth in H1FY21E. We...

However, we expect there can be more downside risk to our estimates for all. We cut our EPS estimates for HUL by 7-8% for FY21 and FY22. We value HUL at 47x on Mar-22E EPS, our TP is at Rs 1,969 (earlier 2,113). Maintain REDUCE. HUL posted weak performance across all fronts in 4QFY20 despite our estimates being lower than consensus. Revenue and volume decline of 9% and 7% was impacted by weak BPC market growth and lockdown led trade de-stocking in March. Lockdown led supply chain disturbance will be resolved in the coming months. However, underlying demand which was already reeling in FY20 will be further impacted in FY21. Consumer trends are expected to change sharply for many categories in FY21. Discretionary, OOH consumption and rural will remain tepid. In our recent thematic report (link), we have already cut down estimates for our coverage universe.

We maintain Buy rating and remain positive on HUVR from a medium-term perspective due to (a) best of breed earnings growth potential, (b) significant synergies in FY22E as a result of GSKCH, and (c) its RoCE levels Distributor and trade inventory were down significantly in Mar20 but are at 75-80% of the normal levels over the last 10 days. Additionally, (a) strong balance sheet, (b) robust cash flow generation and increasing willingness in recent years to use cash flow for inorganic growth, (c) excellent management quality/ corporate governance, and (d) proven track record of consistent delivery even in a weak consumption environment further strengthens our We remain positive on HUVR from a medium-term perspective due to (a) best of breed earnings growth potential beyond the near term owing to its portfolio and execution strengths, (b) significant synergies in FY22E as a result of GSKCH, and (c) its RoCE levels being well ahead of peers.

Near term outlook uncertain but operations improving BUY Hindustan Unilever's (HUVR) standalone turnover (including other operating incomeOOI) for 4QFY20 declined by 9.4% YoY to Rs90.1bn (est. 3.2% growth to Rs102.6bn), which was way below our estimate. Domestic Consumer growth declined by 9% YoY, led by underlying volume declining by 7% YoY (est. 4% volume growth), impacted by continued deceleration in the FMCG market growth pre-Covid (rural and urban growth both were lower compared to 3QFY20), which was further exacerbated by Covid-19 related lockdown starting mid-March. All the three segments declined YoY - Home Care, Personal Care and Foods & Refreshments declined by 4.3%, 13.5% and 6.7%...

HUL announced culmination of GSK merger with 2 key changes 1) acquisition of brand Horlicks for India territory for Rs30.5bn and 2) only distribution rights for OTC brands of GSK with marketing being with Glaxo. The integration path remains quite lengthy and near term hopes rest on ability of HUL to place Horlicks and Boost in small packs using its 3x bigger distribution. Medium to long term gains would test HUL's ability to undertake brand extensions in other food products and compete with nutrition brands like Pediasure in the high science nutrition segment, given that it now owns...

Investment Strategy report for FY 21. The strategy advised is keeping in mind the current challenging environment and contains stock recommendations with short & long term view.

The transaction is subject to fulfilment of certain conditions and both companies would be working together to complete this in the next few months. Glenmark, however, will continue to manage the business until the...

crude decline given volatile pricing scenario. Near term visibility looks hazy given uncertainty on COVID19, however we believe that expected demand recovery from 1QFY21 will be for sure pushed back to 2HFY21. We believe acquisition of VWash brand from Glenmark is positive although it is unlikely Despite near term challenges, we remain positive on HUVR's ability to gain from 1) ability to straddle though products and price points 2) maximum range of new generation products (handwash, body/face wash, hair conditioners, green tea, liquid detergents) 3) most agile and efficient supply...

Moreover, its CAGR performance in the last 5 years/3 years at ~14%/19% has been even more impressive, given the weak earnings growth posted by (much smaller) peers in recent years, amidst a weak operating environment. An unprecedented EBITDA margin improvement of >900bp YoY over the past 10 years ending FY20E has been led by factors such as (a) superior nimbleness in response to raw material cost and competitive stimuli, which has been boosted further by best-of-breed analytics, (b) strong execution of its Winning in Many India (WIMI) strategy, herbal products and more recently on acquisitions as well, and (c) emphasis on premiumization with rigorous focus on cost savings at the same time. performance in the last 3 years at ~8%/~19/~19% and in the last 5 years at ~6%/~14/~14% has been even more impressive, given the weak earnings growth posted by (much smaller) peers in recent years, amidst a weak operating environment.

Even though the short-term demand remains challenging, given the supporting policies presented in Union Budget for FY20-21, we maintain HOLD rating on the stock with a revised target price of Rs. 2,275 based on 50x FY22E adj. EPS. Revenue growth remains positive despite demand concerns In Q3FY20, company reported revenue growth of 2.6% YoY to Rs. 9,808cr, despite declining demand trajectory from both rural and urban markets and peak retail inflation. Food & Refreshment segment (+7.9% YoY to 1,865 cr.) and Home Care...