HINDUSTAN
UNILEVER Q2FY19 RESULT REVIEW:
IS IT GOOD ENOUGH?
The consumption bell-weather Hindustan Unilever
reported its Q2FY19 results on Friday post-market close. For the quarter ended
Sept 30th 2018, the company reported 10% domestic volume growth beating
analyst expectations of 8-9%. HUL’s operating margins at 21.9% were higher than
the CNBC-TV18 Poll of 21.7%. Even the reported net profit of `1525 Cr was above
the CNBC-TV18 Poll of 1452 Cr. While there is no doubt that the FMCG major’
quarterly performance was good, it also opens the door for the all-important
question, is it good enough?
HUL Q2FY19
Results
Revenue +11.1% at
9234 Cr Vs 8309 Cr
EBITDA +20% at
2019 Cr Vs 1682 Cr
EBITDA Margin at
21.9% Vs 20.2%
Net Profit +19.5%
at 1525 Cr Vs 1276 Cr
HUL Q2FY19:
Results v/s CNBC-TV18 Poll
Revenue at 9234
Cr vs Poll at 9311 Cr
EBITDA at 2019 Cr
vs Poll at 2020 Cr
Margins at 21.9%
vs Poll at 21.7%
Profit at 1525 Cr
vs Poll at 1452 Cr
HUL Q2FY19: Key Positives
Volume growth at
10% vs Poll of 8-9%
Alert: 4th
Qtr of double digit volume growth
EBITDA Margins
expand by 160 Bps
All segments saw
double digit volume growth
HUL Q2FY19: THE FINEPRINT
Revenue: That’s the single most important number
while analyzing a consumer company’s results. Any consumer company selling
products of acceptable quality at competitive prices with a reasonable leash on
overheads will be profitable. The key is to sell and keep at it. Revenue growth
is a function of volume & realization/unit. To grow sales, one either sells
the same number of units at a higher price or higher number of units at the
same price, or ideally a combination of both.
While HUL’s 10% volume growth was higher than
analysts’ expectations, the company’s revenue growth at 11% was slightly below
the CNBC-TV18 Poll of 12% growth. This implies, price-led growth of ~1% was
below expectations of 3-4% growth. This mild miss on the revenue front did aid the
company’s reported EBITDA Margins to 21.9% vs Poll of 21.7% as the denominator
was smaller. The absolute EBITDA at 2019 Cr was totally in-line with analyst expectations
of 2020 Cr.
The company attributes this improvement in
operational performance to their sharp focus on cost reduction and improving
efficiencies. That’s good news, but again, is it good enough? More importantly,
is it sustainable?
HUL’s Gross Margins (the measure of revenue over
cost of production) have declined by 70 Bps year-on-year and 200 bps
sequentially. Inflation in crude oil-related input costs seems to outweigh the
lower prices of other non-crude oil related commodities. The pressure of higher
Crude-Oil & weaker INR would only increase in the next few quarters as
prices of crude-related commodities increase with a lag and contracts are
renegotiated. How will this impact on Gross Margins affect the EBITDA Margin,
needs to be monitored.
Over the last year, HUL also spent 30ps less on
Advertising on every Rs. 100 worth sale. In Q2FY18, HUL spent 12.3% of its
revenue on advertising and promotions. In Q2FY19 However, this has reduced to
12% and that’s aided EBITDA Margin expansion. With many innovations, new
launches & increasing competitive intensity, the company may have to ramp
up ad spends. There is a risk that margin expansion in future, may not look as
wide.
HUL Q2FY19: Mgmnt Outlook
Near term Demand
outlook stable
Crude increase
and currency depreciation key watch outs
To focus on volume driven growth and improvement in operating
margin
PRICE, PRICE & PRICE
Hindustan Unilever has delivered double digit
volume growth for 4 straight quarters now. This was aided by a favorable base,
recovering demand and increasing consumer spends. The benefit of a low base has
now vanished. Demand conditions as per HUL’s management have stabilized. It
needs to be monitored if there is room for further improvement in demand
sentiment and consumer spending in an environment of Petrol at `90/Ltr and
impending Food Inflation due to MSP increase in Rabi crops.
Volume
Trend
Q3FY17: -4%
Q4FY17: 4%
Q1FY18: 0%
Q2FY18: 4%
Q3FY18: 11%
Q4FY18: 11%
Q1FY19: 12%
Q2FY19: 10%
So from here, HUL’s revenue growth and the
resultant profit growth will have to be price-led. The management in its
post-result briefing did say they would be taking price increases as and when
required, but will continue to focus on volume led growth. While volume led
growth signifies market expansion, Price Led growth signifies strength in the
marketplace. In this environment of increasing input prices, higher price for
better products (premiumization), lower disruptions (DeMo, GST,
Anti-profiteering) the stage is set for the Soap to Soup giant to showcase some
market strength and report price led growth. The question is, will it choose
this path?
What needs
to be monitored –
Price growth in
the next 4 Quarters
Volume growth for
the next 4 Quarters will look bleak due to high base
Margin trend over
the next 4 Qtrs given competitive intensity & input cost inflation
EBITDA
Margin Trend
Q3FY17: 17.6%
Q4FY17: 20.1%
Q1FY18: 21.9%
Q2FY18: 20.2%
Q3FY18: 19.6%
Q4FY18: 22.5%
Q1FY19: 23.7%
Q2FY19: 21.9%
HUL: VALUE OR GROWTH?
This brings me to the final question: At 46X FY20e
P/E (vs Recent peak of 53X FY20e P/E) is HUL a value stock or a growth stock?
The answer to that lies in the path that HUL decides for the next 4 qtrs. It
would be difficult for HUL to grow volumes beyond 5-7% for the next four
quarters given the high base. If the company doesn’t embellish this volume led
growth with some price led growth, there will be a risk to margin compression
in the current environment and the concomitant profit growth may not exceed far
beyond low double-digits to mid-teens, at best. That’s not growth, and at 46X,
not even value. If an some-element of price growth could boost the consumer
bell-weathers’ profitability, things could look very interesting and
attractive.
Would these results lead to long-term investors
off-loading HUL from their portfolio? Most definitely no. It is the bluest of
the blue-chip investment that has created immense wealth for shareholders in
the long-term.
However, for those on the sidelines waiting to buy,
HUL’s iconic character, ‘Lalitaji’, the no-nonsense, smart, independent,
prudent homemaker, who is conscious of her budget and yet will never compromise
on the quality of products that she buys would say “Intezaar karke kharidari, Main
Hi Samajdari Hai!"
Much Love.
M
PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.
Keep The feedback Coming.
