HINDUSTAN UNILEVER - Q1FY19 HIGHLIGHTS

HINDUSTAN UNILEVER

Q1FY19 HIGHLIGHTS:

FMCG behemoth Hindustan Unilever, opened the Consumer Sector’s Q1FY19 innings with an “in-line” performance. The fact that 12% Volume Growth, 200 Bps Margin Expansion & 24% Growth in Profits is considered “In-Line with estimates” is eerily similar to saying Virat Kohli scoring a century while chasing a gargantuan score is “par for course.” Expectations and valuations are pinned on those who deliver and if stock price is a barometer of the street’s expectations from Hindustan Unilever, the company has added Rupees Two Lakh Crore to its market capitalization in the last 20 months to climb to record levels ahead of results.

HINDUSTAN UNILEVER Q1FY19

-                      Revenue +11.2% at 9487 Cr vs 8529 Cr

-                      EBITDA +20.6% at 2251 Cr vs 1866 Cr

-                      Margins At 23.7% vs 21.8%

-                      PAT +19.2% at 1529 Cr vs 1283 Cr

-                      PAT Before Exceptional Items at 1567 Cr

HUL Q1FY19 v/s CNBC-TV18 Poll

- Volume Growth at 12% vs Expectations of 11-12%

- Revenue at 9487 Cr vs Poll of 9680 Cr

- EBITDA at 2251 Cr vs Poll of 2208 Cr

- Net profit at 1529 Cr vs 1539 Cr

HERE’S WHAT SURPRISED POSITIVELY:

The company’s operational growth was led by improved gross margins, the money it directly makes per product before all the other expenses the company incurs.  HUL’s Gross Margins improved 200 Bps to 54% led by product mix, judicious pricing and cost savings program. Also, the expansion in Gross Margins trickled down to improvement in operational performance as HUL’s EBITDA Margins expanded 190 Bps to 23.7% as well.  This came by despite the company spending higher money on advertisements to support innovations.

HINDUSTAN UNILEVER Q1FY19

-                      Gross Margins at 54% vs 52.1% YoY

-                      GM Led by product mix, judicious pricing and savings program

-                      Ad Spends up 27% YoY at 1153 Cr vs 905 Cr

-                      Advertising and Promotions were stepped up to support innovations

 

NOW WHAT?

Post 24% growth in co’s Q1 EPS, the investors & analysts alike ask themselves and company, the most important question – Now What? The Management sounded off some “pink flags” (red, I thought, is too strong a word) for the near future. While they expect gradual recovery in demand to continue, they’re concerned about the way input costs & currency is behaving. In addition to increased input cost, they expect competitive intensity to spike too. Higher Input Cost Inflation coupled with Increased Competition usually means reduced pricing power. So the question that begets asking is, does Unilever have more levers for further margin expansion?

THE MASSIVE BASE

Q1FY19 Marks the third consecutive quarter in which the consumer giant has delivered double digit volume growth. While the demand environment has seen some improvement improved one can’t ignore the role a favorable base has played towards the reported growth in underlying volumes. Come H2FY19, and these double digit volumes turn into an albatross around HUL’s neck. So to extrapolate these growth trends beyond Q2FY19 may be an overstatement.

HUL VOLUME GROWTH TREND

Q1FY17:  4%

Q2FY17: -1%

Q3FY17: -4%

Q4FY17:   4%

Q1FY18:   0%

Q2FY18:   4% 

Q3FY18:   11%

Q4FY18:   11%

Q1FY19:   12%

THE BIG D: DEMAND!

All said and done, one can’t ignore the optimism in commentary from consumer companies on how they foresee demand. Be it Unilever, Nestle, Marico, Dabur, Emami, Godrej Consumer, Britannia or even Jyothy Laboratories, all companies have stated and re-iterated that there is strong underlying demand, despite disruptions like DeMo and GST. A hat-trick of normal monsoons, state elections, higher minimum support prices, lead up to the 2019 General Elections and the Government’s thrust on improving farm incomes are just the right ingredients to spice this heady cocktail of consumer sentiment up. The expected spurt in innovations, more launches in the Naturals segment, normalizing existing trade channels, higher spends on advertisement and promotions, and visibly increasing presence of modern trade in our daily lives will only make it more difficult to not buy more FMCG products.

BROKERAGES DOWNGRADE HUL

Brokerage     Action              Rating

Citi             Downgrade      Sell

Nomura           Downgrade       Reduce

DB                Downgrade      Hold

Jefferies        Downgrade      Hold

PC                 Downgrade     Hold

ISEC              Downgrade     Hold

Axis Cap         Downgrade     Hold

THE VALUATION PICTURE

Strong sector tailwinds and companies delivering on expectations have kept the prices of all nearly FMCG companies close to record levels. Given Hindustan Unilever trades at 52X FY20e earnings, analysts believe most positives are priced in and warrant a look at other companies that trade at a discount to Hindustan Unilever. It’s not that analysts are finding fault with HUL’s Q1 results or questioning the pedigree of the HUL. The only question, I presume, they’re asking is inspired by an old Ad by HUL’s competitor Nirma,  – “ Jab Wahi Safedi, Wahi Jhaag, Kam Daamon mein Mile, toh Koi Yeh Kyun Le? Woh Na Le?”

HUL VALUATIONS VS COMPETITION

HUL         52X

GCPL       42X  

Emami     38X

Dabur      35X

ITC           27X

#FY20e

Much Love.

M

PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

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