Hindustan Unilever Q4FY18 Results: Dho Daala!

Hindustan Unilever Q4FY18 Results: Dho Daala!

If you’re an ad-buff like me, chances are, you’ll remember the old Surf Excel Tagline – Dho Daala! I’ve decided to pull this out from the archives to describe its parent Hindustan Unilever’s Q4FY18 Results. The company has managed to wash away all analyst expectations aside and report a stellar beat on all parameters this quarter.

For starters, it’s the Domestic Volume Growth of 11% that has surprised the street the most. Yes, Hindustan Unilever posted comparable domestic revenue growth of 16% in Q4, led by 11% underlying volume growth.  Across all the analyst-reports I referred to for consensus expectations, 6-8% was the general estimate. 11% Volume Growth in Q4 marks the company’s second straight quarter of double digit volume growth and this time, it’s without a favourable base. Remember, Q3FY18 saw 11% volume growth after 5 Yrs and that too because Q3FY17 witnessed 4% decline in Domestic Volumes owing to disruptions caused by demonetization.

HUL Q4FY18 YOY

Total Income +10.8% at 9097 Cr vs 8213 Cr

Comparable Domestic Sales +16% YoY

HUL Volume Growth 

Q3FY17    -4%

Q4FY17   +4%

Q1FY18     0%

Q2FY18   +4%  

Q3FY18   +11%

Q4FY18   +11%

It’s heartening to see that the company has posted double digit domestic volume growth without hampering margins.  In fact, a very strong operational performance will go down as the key highlight of HUL’s Q4 results. The company’s EBITDA margins expanded by 240 basis points on a reported basis and 160 basis points on a comparable basis, as per their Press Release. Cost Savings have come by on account of the company’s strong focus on cutting down non value adding expenses. Other Expenses have remained under control, while we also saw 150 Bps Improvement in Gross Margins.

However, the company’s focus on innovation and activation continues. For the second straight quarter we saw Ad Expenditure increase in excess of 25%. The street would view this positively.

HUL Q4FY18 YOY

EBITDA +24% at 2048 Cr vs 1651 Cr

EBITDA Margins at 22.5% vs 20.1%

Gross Margins at 52.6% vs 51%

Ad Expenses +25% at 1070 Cr vs 853 Cr

Net Profit +14.2% at 1351 Cr vs 1183 Cr

Exceptional Loss of `64 Cr

Hindustan Unilever’s reported Net Profit in Q4 clocked in gains of 14.2%, but there was a 64 Cr exceptional loss. If one was to adjust for the one-time expense, the FMCG Major’s comparable profits grew 26% YoY, that’s comfortably above even the highest estimates made by the analyst community.

So, what led to the growth? HUL’s management says, there was broad based volume growth across all segments of the company. All Verticals, Home Care, Personal Care, Foods & Refreshments witnessed double digit growth and margin expansion. The Natural’s portfolio and Innovative launches made by HUL grew 2.5X the average growth at HUL.

HUL Q4FY18 Segments:

Home Care:  Double-digit volume growth

Personal Care: Double-digit growth across Personal Products and Personal Wash

Foods: Good growth in Kissan and Knorr

Refreshment: Robust growth across Tea, Coffee & Ice-creams

I was listening in to the company’s earnings call, wherein the Top Mgmnt sounded rather confident about resumption of normalcy in all trade channels, an improving demand environment and the company’s focus to succeed consistently and profitably despite increasing competitive Pressure. Mgmnt commentary was particularly positive on the company’s brands Ayush and Indulekha in the Naturals Portfolio. While we kept hearing cautious calls from the top brass regarding an increasing input cost environment throughout the earnings call, the management sounded reasonably assured of their ability to tackle it, just as they have done so in the past.

HUL Q4FY18: Concall Takeaways

Trade Channels have Returned to Normalcy

Naturals Portfolio - Indulekha & Ayush doing well 

Premium Segment of Portfolio did better; popular range saw muted Growth

Indulekha is growing much faster than anticipated

Innovations and Naturals growing 2.5x avg

Expect Demand to Continue to Improve

Will continue to focus on operational efficiencies

Will manage inflationary headwinds as we have in the past

So, all said and done, the big question arises  - What Next? Remember, Hindustan Unilever is trading at Record High. The Stock has added 80% to its humongous market cap in the last 18 months and it’s trading at a record high P/E multiple of nearly 49X FY20e earnings. Ahead of results the consensus FY20e EPS on the street was 31 vs 24 in FY18. It will be very interesting to see if and to what extend to brokerages tweak these expectations upward given High Base, Increased Input Cost Environment and Record Valuations. Can there be a re-rating, will HUL cross ITC’s market cap tomorrow or will the fate of the HUL stock be similar to that of Titan, Dabur, Emami and Jubilant Foodworks which saw profit booking despite good showing in the current quarterly results, only time will tell. So let’s end it with a take on another Unilever tagline, Results Achhe Hain!

HUL Stock up 80% Since 2017; Trades at 49X FY20e

 Will Valuations be a speed-breaker? 

How Much More Can Analysts Tweak Expectations By?

EPS

FY18                 24

FY20e               31

Epilogue - 

Parsing All Through Brokerage Commentary This Morning - 

Headline Comments buy Brokerages

CLSA – Just Wow!
DB – How Good is Good?
Edelweiss - Bellwether rules unperturbed
Nirmal Bang - Rewards of Consistency
Morgan Stanley - Priced in                    
Nomura - Growth Recovery Already Built In

Upgrades 

Consensus FY20e EPS

Earlier      `31

Revised     `34 

Consensus Target Multiple 

 Earlier           49X 

Revised         50X

Target Price Revisions

             Old         New

DB         1700      1800

NB         1700       1750

CLSA     1575       1650

Phillip    1585       1670

CS           1530       1675

Nomura 1324      1430

MS         1120      1260