Result Update

January 18, 2016

Rating matrix
Rating
Target
:
:
Buy
| 1000
Hindustan Unilever (HINLEV) | 810
Target Period : 12 months
Potential Upside : 23%
Price cuts chipping away at topline growth…
What’s changed? • Hindustan Unilever (HUL) reported its Q3FY16 numbers, which were
Target Changed from | 1017 to | 1000
in line with our estimates on the volume growth and margins front.
EPS FY16E Changed from | 20.8 to | 18.7
EPS FY17E Changed from | 24.8 to | 23.2
However, net sales grew 3.2%, lower-than-expected, to | 7822.9
EPS FY18E Changed from | 28.1 to | 26.7 crore (I-direct estimate: | 8059.2 crore). Volume growth was 6%
Rating Unchanged whereas aggressive price cuts led to realisation de-growth for HUL.
Sales growth in S&D, personal products, beverages & foods was
Quarterly performance 0.8%, 5.6%, 7% & 11.8%, YoY, respectively
Q3FY16 Q3FY15 YoY % Q2FY16 QoQ % • Operating margins improved 80 bps to 17.9% (I-direct estimate:
Sales 7822.9 7579.2 3.2 7819.6 0.0 17.8%) on the back of softer RM cost (293 bps decline as percentage
EBITDA 1430.8 1331.5 7.5 1325.9 7.9
of sales) despite 165 bps increase in A&P spend as percent of sales
EBITDA % 17.9 17.1 80 bps 16.7 126 bps
• PAT declined 22.4% YoY to | 971.4 crore due to presence of
PAT 971.4 1252.2 -22.4 962.2 1.0
exceptional gain of | 396.6 crore in Q3FY15 and exceptional loss of
Key financials | 79.6 crore in Q3FY16 coupled with 175 bps increase in tax rate
| Crore FY15 FY16E FY17E FY18E Volume growth expected to improve to ~7-8% FY17E onwards
Net Sales 30,171 31,518 34,565 38,264
EBITDA 5,208 5,638 6,428 7,283
HUL’s volume growth decelerated in line with the economic downturn
Net Profit 4,315 4,055 5,019 5,786 from ~13% (FY11) to 5% in FY15, largely on the back of a slowdown in
EPS(|) 19.9 18.7 23.2 26.7 urban discretionary demand with rural growth remaining moderate. HUL
Adj. EPS(|) 15.8 16.9 20.0 23.3 witnessed 6% volume growth in 9MFY16. Going ahead, we believe
volume growth would remain moderate until FY16E led by a slower
Valuation summary revival in GDP growth & headwinds in rural consumption. However, we
FY15 FY16E FY17E FY18E believe that as the economy revives and growth gains traction, HUL’s
P/E 40.6 43.2 34.9 30.3 strong portfolio of brands across segments would aid volume growth
Target P/E 50.1 53.4 43.1 37.4
back to ~7-8%, going forward.
Div. Yield 1.9 2.0 2.5 3.0
Mcap/Sales 5.8 5.6 5.1 4.6 Volumes to lead soaps & detergents growth
RoNW (%) 91.8 97.7 116.2 145.6 S&D, HUL’s largest revenue contributing segment (~48% in FY15)
RoCE (%) 101.4 132.6 152.5 185.0 witnessed modest CAGR of 12.5% in FY10-15 led by an equal mix of
Stock data
volumes & prices. The pricing power of HUL is backed by the strong
Particular Amount
leadership position of HUL in both segments (~40% of value share in
Market Capitalization (| Crore) 175,243.5 detergents and ~45% value share in soaps) and its presence across the
Total Debt (FY15) (| Crore) 0.0 value pyramid in each of them. Going ahead, we believe volume growth
Cash and Investments (FY15) (| Crore) 5,161.4 in S&D would be the key revenue growth driver estimated at 6.6% CAGR
EV (| Crore) 170,082.1 (FY15-18E) on the back of high A&P spend. Surf, HUL’s largest brand
52 week H/L 981 / 769 (~| 2600 crore in FY15), Lifebuoy, Wheel & Rin are | 2000+ crore brands.
Equity capital | 216.4 crore We believe realisation growth would be led by premiumisation with a
Face value |1 revival in urban discretionary demand, going forward.
Price performance Premiumisation to steer growth in personal products
Return % 1M 3M 6M 12M HUL’s PP (~29% of revenues, ~47% of PBIT in FY15) growth at 12.3%
HUL -6.1 1.7 -13.4 -12.7 CAGR (FY10-15) was largely led by volumes following lower penetration
ITC -2.7 -10.3 -0.1 -12.4 of oral, hair & skin care products and HUL’s strengthening presence
GCPL -5.3 1.2 3.4 16.2 across these segments led by its strong brands, Fair & Lovely, Ponds,
Colgate -8.4 1.1 -8.9 -5.7
Lakme, Clinic Plus, Close-Up, etc. We believe, going ahead, HUL’s brand
Research Analyst strength would lead sales growth to 11.8% CAGR (FY15-18E) as
Sanjay Manyal
consumer demand gains traction.
sanjay.manyal@icicisecurities.com Visibility in earnings, margins justify premium valuation; maintain BUY
Parth Joshi With strong brands in the growing aspirational segments, HUL, aided by
parth.joshi@icicisecurities.com an improvement in margins (17.5% in FY16E, 18.2% in FY17E & 18.7% in
Parineeta Rajgarhia FY18E), is strongly placed to capture a revival in consumer demand,
parineeta.rajgarhia@icicisecurities.com going forward. We estimate sales growth & profitability growth of 8.2%
and 10.3% CAGR, respectively, in FY15-18E. We value the stock at 37x its
FY18E EPS of | 26.7 and arrive at a target price of | 1000/share with a
BUY recommendation.

ICICI Securities Ltd | Retail Equity Research

Variance analysis
Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments
Net Sales 7,822.9 8,059.3 7,579.2 3.2 7,819.6 0.0 Net sales grew 3.2% led by 6% volume growth. HUL took
aggressive price cuts to pass on the benefits of benign commodity
prices to consumers
Operating Income 158.1 161.2 195.1 -19.0 135.8 16.5

Raw Material Expenses 3,742.1 4,022.5 3,848.0 -2.8 3,899.5 -4.0 With the decline in palm oil, PFAD & crude, raw material costs as
percentage of sales dipped 293 bps in the quarter
Employee Expenses 401.6 411.0 441.8 -9.1 380.8 5.5
Marketing Expenses 1,137.8 1,160.5 977.1 16.4 1,145.0 -0.6 A&P spend increased 165 bps as percentage of sales
Other operating expenses 1,268.6 1,164.6 1,175.9 7.9 1,204.2 5.3

EBITDA 1,430.8 1,461.8 1,331.5 7.5 1,325.9 7.9

EBITDA margin (%) 17.9 17.8 17.1 80 bps 16.7 126 bps Operating margins increased 80 bps led by lower RM costs

Depreciation 82.2 72.1 73.1 12.4 76.1 7.9

Interest 0.1 0.0 4.2 -98.8 0.0 66.7
Other Income 139.6 210.8 120.1 16.3 170.2 -18.0

PBT 1,488.2 1,600.5 1,374.3 8.3 1,407.7 5.7

Exceptional Items -79.6 0.0 396.6 -120.1 -12.1 555.8 Exceptional items include provision towards restructuring &
contested matters and gain due to property sales
Tax Outgo 437.2 502.7 518.7 -15.7 445.5 -1.9
PAT 971.4 1,097.8 1,252.2 -22.4 962.2 1.0 Net profit dropped 22.4% mainly on the back of an increase in tax
rate for the company as tax benefits get phased out and presence
of exceptional income in Q3FY15 & exceptional loss in Q3FY16

Key Metrics growth YoY (%)

Soaps & detergents 0.8 10.7 6.0 1.6 Muted sales growth in S&D with price de-growth offsetting
volume growth
Personal Products 5.6 3.6 6.5 9.5 Personal products category impacted by delayed winter
Beverages 7.0 6.9 8.2 5.9 Bru coffee achieved market leadership. It now leader by volume &
value
Foods 11.8 34.7 12.6 12.4 Eight new variants Knorr Chef's Masalas launched towards end of
Q3FY16. Knorr Chinese noodles relaunched in market. Two non-
vegetarian variants added to Knorr instant soups portfolio

Source: Company, ICICIdirect.com Research

Change in estimates
FY17E FY18E
(| Crore) Old New % Change Old New % Change Comments
Sales 36,790.1 34,565.3 -6.0 40,944.6 38,264.1 -6.5 We have revised our estimates as overall sales growth remains adversely impacted by
aggressive price cuts on the back of lower input costs
EBITDA 6,933.0 6,428.2 -7.3 7,817.3 7,282.9 -6.8 We believe any savings in RM cost would aid in increasing A&P spend for the
company
EBITDA Margin (%) 18.5 18.2 -24 bps 18.7 18.7 -6 bps
PAT 5,374.6 5,018.7 -6.6 6,072.8 5,785.6 -4.7
EPS (|) 24.8 23.2 -6.6 28.1 26.7 -4.7
Source: Company, ICICIdirect.com Research

Assumptions
Current Earlier Comments
(| crore) FY15 FY16E FY17E FY18E FY16E FY17E FY18E
Soaps & detergents 14,876.6 15,591.0 16,768.3 18,037.9 16,439.7 18,314.8 20,089.8 We expect lower input costs to keep sales growth under check
Personal Products 9,006.5 9,806.6 10,984.4 12,602.4 10,070.2 11,710.3 13,364.4
Beverages 3,631.5 3,931.3 4,490.9 5,027.5 3,931.3 4,490.9 5,012.7
Foods 1,891.8 2,262.2 2,451.9 2,813.7 2,262.2 2,451.9 2,737.8
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Company Analysis
Volumes to drive soaps & detergents growth
S&D comprises the largest revenue segment for HUL contributing ~48%
to revenues (FY15). HUL’s strong brands in soaps (Lifebuoy, Lux, Liril and
Rexona) and detergents (Wheel, Surf Excel, Surf, Vim) have aided the
company’s dominant position in both segments (~40% of value share in
detergents & ~45% value share in soaps) over the years despite the
constant tough competition from global player, P&G. Hence, despite the
high penetration in the segment (~99%), S&D revenue growth of 12.5%
CAGR in FY10-15 has been a mix of volume and price led growth.
Going ahead, we believe S&D revenues would be largely driven by
volumes as soft input costs would lead to price cuts in the form of
promotions. HUL’s pricing power in the segment along with increasing
rate of premiumisation would aid realisation growth. We expect S&D
revenues to grow at a CAGR of 6.6% in FY15-18E. With higher
contribution of prices in the sales mix, we believe margins from the
segment would also improve, thereby increasing the segment’s
contribution to overall EBIT from ~40% in FY15.
Exhibit 1: S&D revenue (| crore) and YoY growth (%)

20000 25
18000 21.0 20
19.4
16000 15
14000 10
7.7 8.7 7.6 7.6
12000 6.4
4.8 5
10000
0
8000
6000 -5
4000 -10
2000 -16.4 -15
0 -20
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Soaps & Detergents Sales (LHS) S&D Sales Growth (RHS)

Source: Company, ICICIdirect.com Research

Exhibit 2: S&D EBIT (| crore) – LHS & S&D EBIT Margin (%) – RHS Exhibit 3: S&D’s revenue, EBIT contribution to overall performance

15.0 60 49.3
2500 14.3 16 48.1 46.5 48.9 49.0 48.4
12.7 13.7 44.6
50
11.6 14
2000 13.1
9.5 12 4046.3
10 42.3 40.0 40.1
1500 30 36.9 39.6
8 30.5
1000 20
6
`
4 10
500
2 0
0 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15
FY09 FY10 FY11 FY12 FY13 FY14 FY15

S&D EBIT S&D EBIT Margin (%) Contribution to Revenues Contribution to EBIT

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

 Premiumisation to steer growth in personal products
Personal products (PP), the highest contributor to HUL’s PBIT (~47% in
FY15) over the years, has witnessed a moderation in revenue growth and
segmental margins following the slowdown in consumer discretionary
demand and increasing competition. PP revenue growth moderated from
high double digits in CY07-FY12 to high single digits in FY14. The growth
in CY07-FY12 was led largely by volumes with price increases remaining
minimal. With the acquisition of Indulekha brand from Mosons Group for
a consideration of | 330 crore in Q3FY16, HUL seeks to leverage its strong
brand equity in personal care segment and tap into the growth potential
across the nascent ‘naturals’ segment in personal care.
We believe that with HUL’s strong brand portfolio across the value
pyramid (Premium - Pond’s, Axe, Dove, Close Up; Popular - Vaseline,
Sunsilk, Pepsodent; Mass – Fair & Lovely, Clinic Plus) and presence
across all categories of personal care (hair care, oral care, skin care,
men’s grooming, cosmetics & services), the company will be the key
beneficiary from a revival in discretionary demand and booming personal
products demand in the economy. During Q3FY16, Lakme 9 to 5
Weightless Mousse was launched by HUL while it added more shades to
the Lip & Kajal portfolio. HUL’s premium hair care brand TRESemme
became a | 100 crore brand in FY15 further helping the company in the
implementation of its premiumisation strategy. We expect the PP
segment to post CAGR (FY15-18E) at 11.8% and revive its contribution to
EBIT to FY11-12 levels (52-54%). The higher contribution to EBIT would
also be aided by increasing rate of premiumisation once demand revives.

Exhibit 4: Personal product revenues (| crore) and growth (%) trend

14000 20
15.8
17.1 14.7
12000
12.0 15
10.9
10000 9.1 8.9
8.7
10
8000

6000 5

4000
0
2000-6.3
-5
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
-2000 -10

Personal Products Sales (LHS) PP Sales Growth (RHS)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4

Exhibit 5: PP EBIT (| crore) – LHS and PP EBIT margin (%) - RHS Exhibit 6: PP’s revenue, EBIT contribution to overall performance

3000 28 3000 28
2424.4 2424.4
2500 27
26.9 2500 27
26.9
1948.9 2068.1 1948.9 2068.1
2000 26.5 1744.6 27 2000 26.5 1744.6 27
1429.0 1494.8 1429.0 1494.8
1500 1296.5 26.1 26 1500 1296.5 26.1 26
25.7 25.6 25.7 25.6
1000 25.5 25.5 26 1000 25.5 25.5 26
500 ` 25 500 ` 25
0 25 0 25
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY13 FY14 FY15

PP EBIT PP EBIT Margin (%) PP EBIT PP EBIT Margin (%)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Premiumisation to be key revenue driver for beverages

HUL’s beverage business (tea brands: Lipton, Taj Mahal, Red Label;
coffee brands: Bru) growth at 11.1% CAGR (FY10-15) has been led largely
by prices following the high penetration of tea consumption in India,
keeping volume growth muted. HUL is the second largest branded tea
company in the country and is growing aggressively in the branded
coffee business with its brand Bru. Bru coffee became market leader by
volume and value in Q3FY16. We believe that with increasing green tea
and coffee culture in the country (home and out-of-the home) and shift of
consumers to premium flavoured teas and tea bags, premiumisation
would be the key revenue driver for HUL’s beverage portfolio, going
ahead. We expect revenue growth at 11.5% CAGR in FY15-18E. We
believe with the increasing contribution of premium brands in sales mix,
EBIT and EBIT margins from the segment would also improve further.

Exhibit 7: Beverages revenues (| crore) and growth (%) trend

6000 20

5000
15
4000
10
3000

2000 5

1000
0
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E -5
-1000

-2000 -10

Beverages Sales (LHS) Beverages Growth (RHS)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 5

Exhibit 8: Beverages EBIT (| crore) – LHS and EBIT margin - RHS Exhibit 9: Beverages revenue & EBIT contribution to overall performance

700 20 14 13.1 13.0

16.9
15.3 16.0 13 11.4 12.0
600 14.9 17.5 11.8
14.0 11.0
13.4 15 12
500
11 9.6 12.1 11.9 12.0 11.9 11.8
400 1011.2 11.6
10
300 9
8
200 5 7
100 6
0 0 5
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Beverages EBIT Beverages EBIT Margin (%) Contribution to Revenues Contribution to EBIT

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Foods business growth expected at 14.1% CAGR in FY15-18E

The foods segment, the biggest opportunity for the future but the weakest
performer in HUL’s portfolio, posted healthy revenue growth of 21%
CAGR in FY10-15 but remained a dragger on the earnings front.
Segmental margins have remained subdued over the years. We believe
that though HUL has strong brands in the segment, Kissan, Knorr, Kwality
Walls, the company has been unable to establish itself in the higher
growth segments of packaged food (noodles, dairy, biscuits), keeping
earnings growth muted. HUL has been ramping up its presence across
various categories recently (premium ice cream Magnum, Kissan Twist
ketchup, relaunch of Kissan Mango as flagship jam). In Q3FY16, it
relaunched Knorr Chinese noodles and added two variants to the instant
soups portfolio. It introduced eight variants of Knorr Chef’s Masalas at the
end of Q3FY16. Going ahead, we believe that increasing competition in
the segment from leading players in the branded foods category (Nestlé,
ITC, Britannia) would keep HUL’s foods revenue growth at 14.1% CAGR
(FY15-18E) with no significant contribution to EBIT until FY16E.

Exhibit 10: Foods revenues (| crore) and growth (%) trend

3000 22.4 25
19.6
2500 20
14.8 14.8
2000 15.487 15
10.8
9.5
8.4
1500 10

1000 5

500 0

0-7.8 -5
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
-500 -10

Foods Sales (LHS) Foods Sales Growth (RHS)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6

Exhibit 11: Foods EBIT (| crore) – LHS and EBIT margin - RHS Exhibit 12: Foods revenue and EBIT contribution to overall performance

70 6 6.3
7 6.0 5.9 6.2
4.4 5 5.8
60
6 5.1
50 4 5.4
3.7 5
40 2.5
3 4
30 1.8
1.1 2 3
20 1.4 1.6
0.5 2 0.6 1.2 0.9
10 0.1 1 0.7
0.3
1
0 0
0
-10 FY09 FY10 FY11 FY12 FY13 FY14 FY15 -1
FY09 FY10 FY11 FY12 FY13 FY14 FY15

Foods EBIT Foods EBIT Margin (%) Contribution to Revenues Contribution to EBIT

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7

 EBITDA margin improvement to 18.7% by FY18E
HUL has maintained its raw material (RM) cost to sales ratio at ~53% over
the years (CY07-FY15). In spite of an unprecedented increase in RM costs
in FY12 (~54%), the company’s strong brand equity across categories
helped it to pass on the impact through higher prices while maintaining
margins and volume growth. Going ahead, with HUL shifting its focus
towards higher growth and premium product categories that would drive
higher realisation, we expect raw material cost as a percentage of sales to
moderate to 48.8% by FY18E on the back of global decline in commodity
prices as well as HUL’s internal cost efficiencies and aid margins to 18.7%
by FY18E. We believe the savings in raw material costs would be directed
towards higher marketing spends to fight competition and aid new
launches.
Exhibit 13: EBITDA margin (%) and RM cost to sales (%) trend

20 18.7 56
19 18.2
17.5 55
18 16.9
54
17 16.0
15.5 15.5 53
16 14.9
15 13.7 52
14 51
13
50
12
11 49
10 48
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

EBITDA Margin (%) - LHS RM cost to sales (%) - RHS

Source: Company, ICICIdirect.com Research

Higher margins & lower taxes to aid PAT growth

HUL’s effective tax rate has increased over the years from ~17% in CY07
to ~23% in FY14 and ~30% in FY15 as a result of phasing out of tax
benefits. However, going ahead, we believe that lower corporate tax rate
would more than compensate for expiry of tax benefits in most of its
factories. We believe a strong 180 bps improvement in operating margins
due to a decline in RM cost would result in steady earnings growth at
10.3% CAGR in FY15-18E.

ICICI Securities Ltd | Retail Equity Research Page 8

 Exhibit 14: Adjusted PAT (| crore) & tax rate (percentage of PBIT)

6000 40
5039
35
5000 4328
30
4000 3663
3214 3421 25
2866
3000 2383 20
2008 1982 15
2000
10
1000
5
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

PAT - LHS Tax Rate (% of PBIT) - RHS

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

 Outlook & valuation
We believe that though HUL’s volume growth would remain subdued
until FY16E, being the largest FMCG player in the country, it would be the
key beneficiary of a revival in consumer demand, going forward. HUL’s
strong portfolio of brands across segments would aid volume growth
back to ~7-8%, going forward. HUL’s key growth driver would be the
company’s presence across the value pyramid in the segments where it is
present. Also, with the company’s increasing focus towards
premiumisation (launch of liquid detergents, Magnum, Sunsilk Keratin
range, Lipton Green Tea, Bru Gold, flavoured tea bags, etc), we believe
revenue and margin growth would continue to remain healthy with a
revival in discretionary demand.
HUL’s soaps and detergents growth would be largely led by volumes
given the company’s dominance and ability to develop the market on the
back of promotions in the segment. Hence, we expect S&D revenue
growth at 6.6% CAGR (FY15-18E). For personal products, we believe
higher innovation and premiumisation would be key revenue drivers. We
expect heightened activity on part of the company in this segment to
regain its lost volume growth. We expect revenue growth in PP to revive
to 11.8% CAGR (FY15-18E). For beverages, we believe premium tea and
coffee would drive revenue growth at 11.5% CAGR (FY15-18E). We
expect HUL’s food business growth at 14.1% (FY15-18E) CAGR largely led
by realisation growth.
HUL’s Board of Directors has approved a scheme of arrangement to
return | 2187.3 crore (excess cash reserve) to shareholders. The company
will seek the approval of shareholders and sanction of the High Court of
Mumbai before going ahead with it. If implemented, this move by the
company is expected to drive the efficiency of the company’s balance
sheet and significantly improve return ratios further for HUL (RoCE of
101.4% and RoE of 91.8% in FY15). This corporate action is expected to
be completed by FY17E.
With prolonged revenue and earnings growth visibility led by a revival in
volume growth and improving product mix, we believe the stock would
command a premium to its peers. We believe that an improvement in
operating margins (17.5% in FY16E, 18.2% in FY17E and 18.7% in FY18E)
due to subdued commodity prices globally, premiumisation strategy as
well as reducing corporate tax rate, going forward, augur well for the
company and justify premium valuation. We value the stock at 37x its
FY18E EPS of | 26.7 to arrive at a target price of | 1000 per share and
maintain BUY recommendation.

Exhibit 15: Valuations

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE
(| cr) (%) (|) (%) (x) (x) (%) (%)
FY15 30170.5 10.1 19.9 11.5 40.6 33.2 91.8 101.4
FY16E 31517.5 4.5 18.7 -6.0 43.2 30.8 97.7 132.6
FY17E 34565.3 9.7 23.2 23.8 34.9 26.9 116.2 152.5
FY18E 38264.1 10.7 26.7 15.3 30.3 23.6 145.6 185.0
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

Company snapshot

1,100

1,000 Target Price | 1017

900

800

700

600

500

400

300

200

100

0
Dec-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-15

Jun-16
Sep-09
Dec-09

Sep-10
Dec-10

Sep-11
Dec-11

Sep-12
Dec-12

Sep-13
Dec-13

Jun-14
Sep-14
Dec-14

Sep-15
Dec-15

Sep-16
Dec-16

Jun-17
Sep-17
Dec-17
Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17
Source: Bloomberg, Company, ICICIdirect.com Research

Key events
Event
2008-09 Stock remains a non-performer following no key innovations and significant increase in palm oil and crude oil prices keeping earnings growth moderate
FY09 Volume growth starts declining following weakening economic growth. Volumes witness de-growth of 5% during January-March, 2009
Oct-Dec, 2009 Led by the slowdown in CY09, volume growth until Q3FY10 remains below 5% with market share falling across categories
Feb-10 Launches 'Must Win, 2010' programme involving strategic pricing & huge distribution push to mop up the company's falling performance
Dec-10 Though profit growth remains moderate at 15%, the stock posts a return of ~28% following strong volume growth and marketing initiatives of HUL
Q4FY11 Soaps & detergents margins get dented drastically due to exceptional increase in input (LAB) costs leading the stock to correct ~21% from January-March, 2011
Q1FY12 Hikes prices (5-8% overall & ~21% in S&D) to pass on input cost inflation. Gains market share from unorganised players with rising input costs
Softening in volume growth to high single digits along with slowing rate of premiumisation. However, stock continues to rise until October, 2012 (return of ~40%
H1FY13 from April, 2013) mirroring the FMCG Index as defensives were the safest bet in the market considering the slowing economic scenario
H2FY13 Stock declines ~12% led by consistent weakness in volume growth (low sigle digits)
Apr-13 Unilever announces open offer at | 600/share to increase its stake in HUL to 75% from 52.5%
Jul-13 The stock soars ~12% on account of FTSE and MSCI re-balancing post the closure of open offer
Oct-14 Volume growth remains subdued at 4% as urban discretionary demand remain dismal
Dec-14 Commodity prices including palm oil, crude and related derivatives witness significant decline
Dec-15 HUL signs an agreement with Mosons Group to acquire Indulekha, a premium Ayurvedic hair oil brand, for a consideration of | 330 crore
Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
1 Unilever PLC 30-Sep-15 67.21 1,454.4 0.0 Promoter 67.2 67.2 67.2 67.2 67.2
2 Life Insurance Corporation of India 30-Sep-15 1.48 32.0 8.9 FII 15.1 15.0 15.0 14.6 13.9
3 Vontobel Asset Management, Inc. 30-Sep-15 1.10 23.8 -0.1 DII 3.9 3.9 3.8 4.2 4.8
4 Aberdeen Asset Management (Asia) Ltd. 31-Oct-15 1.07 23.1 0.0 Others 13.8 13.9 13.9 14.0 14.1
5 The Vanguard Group, Inc. 30-Nov-15 0.92 19.9 0.0
6 BlackRock Institutional Trust Company, N.A. 31-Dec-15 0.84 18.1 -0.6
7 Aberdeen Asset Managers Ltd. 30-Nov-15 0.62 13.4 0.0
8 William Blair Investment Management, LLC 30-Sep-15 0.28 6.0 6.0
9 APG Asset Management 30-Jun-15 0.20 4.2 -0.1
10 Franklin Advisers, Inc. 30-Sep-15 0.19 4.2 4.2
Source: Reuters, ICICIdirect.com Research

Recent Activity
Buys Sells
Investor name Value Shares Investor name Value Shares
Life Insurance Corporation of India 110.59m 8.89m William Blair & Company, L.L.C. -138.16m -11.11m
William Blair Investment Management, LLC 74.12m 5.96m BlackRock Institutional Trust Company, N.A. -8.36m -0.64m
Franklin Advisers, Inc. 52.1m 4.19m Lion Global Investors Limited -2.95m -0.2m
Tata TD Waterhouse Asset Management, Ltd. 2.56m 0.21m Birla Sun Life Asset Management Company Ltd. -2.45m -0.2m
J.P. Morgan Asset Management (Hong Kong) Ltd. 2.23m 0.18m DNB Asset Management (Asia) Limited -2.88m -0.2m

ICICI Securities Ltd | Retail Equity Research Page 11

Financial summary
Profit and loss statement | Crore Cash flow statement | Crore
(Year-end March) FY15 FY16E FY17E FY18E (Year-end March) FY15 FY16E FY17E FY18E
Total operating Income 30805.6 32147.9 35256.7 39029.4 Profit after Tax 4,315.3 4,055.2 5,018.7 5,785.6
Growth (%) 9.9 4.4 9.7 10.7 Add: Depreciation 286.7 296.2 289.3 284.8
Raw Material Expenses 15,623.6 15,778.4 17,007.1 18,660.1 (Inc)/dec in Current Assets -94.5 -553.3 -410.4 -822.8
Employee Expenses 1,578.9 1,607.4 1,780.1 1,970.6 Inc/(dec) in CL and Provisions 179.0 845.1 1,167.8 1,574.6
Marketing Expenses 3,874.9 4,570.0 4,942.8 5,395.2 CF from operating activities 4686.4 4643.2 6065.5 6822.1
Administrative Expenses 1,930.8 1,985.6 2,160.3 2,391.5 (Inc)/dec in Investments -17.9 -800.0 -250.0 -100.0
Other expenses 2,589.2 2,568.7 2,938.1 3,329.0 (Inc)/dec in loans & advances 22.1 -25.0 -25.0 -25.0
Total Operating Expenditure 25,597.4 26,510.1 28,828.5 31,746.4 (Inc)/dec in Fixed Assets -481.4 -271.0 -300.0 -100.0
EBITDA 5208.2 5637.7 6428.2 7282.9 Others -25.0 -846.9 19.9 21.2
Growth (%) 16.4 8.2 14.0 13.3 CF from investing activities -502.3 -1942.9 -555.1 -203.8
Depreciation 286.7 296.2 289.3 284.8 Issue/(Buy back) of Equity 0.1 0.0 0.0 0.0
Interest 16.8 0.0 0.0 0.0 Inc/(dec) in loan funds 0.0 0.0 0.0 0.0
Other Income 618.4 654.3 979.9 1,037.4 Dividend paid & dividend tax -3,881.2 -4,032.8 -5,041.0 -6,049.1
Exceptional Income 664.3 -82.0 0.0 0.0 Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0
PBT 6,187.4 5,913.9 7,118.7 8,035.5 Others 13.6 0.0 0.0 0.0
Total Tax 1,872.2 1,858.7 2,100.0 2,249.9 CF from financing activities -3867.5 -4032.8 -5041.0 -6049.1
PAT 4315.3 4055.2 5018.7 5785.6 Net Cash flow 316.6 -1,332.4 469.4 569.1
Growth (%) 11.6 -6.0 23.8 15.3 Opening Cash 2,221.0 2,537.6 1,205.1 1,674.5
EPS (|) 19.9 18.7 23.2 26.7 Closing Cash 2537.6 1205.1 1674.5 2243.7
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios

(Year-end March) FY15 FY16E FY17E FY18E (Year-end March) FY15 FY16E FY17E FY18E
Liabilities Per share data (|)
Equity Capital 216.4 216.4 216.4 216.4 EPS 19.9 18.7 23.2 26.7
Reserve and Surplus 3,508.4 3,530.9 3,508.6 3,245.0 Cash EPS 21.3 20.1 24.5 28.1
Total Shareholders funds 3,724.8 3,747.2 3,725.0 3,461.4 BV 17.2 17.3 17.2 16.0
Other Non Current Liabilities 170.1 170.1 170.1 170.1 DPS 15.0 16.0 20.0 24.0
Long Term Provisions 956.4 109.9 129.8 151.2 Cash Per Share 11.7 5.6 7.7 10.4
Total Liabilities 4851.2 4027.2 4024.9 3782.6 Operating Ratios (%)
Assets EBITDA/Total Operating Income 16.9 17.5 18.2 18.7
Gross Block 4,408.6 4,708.6 5,008.6 5,208.6 PBT Margin 17.9 18.7 20.2 20.6
Less: Acc Depreciation 1,973.1 2,269.3 2,558.6 2,843.4 PAT Margin 14.0 12.6 14.2 14.8
Net Block 2,435.5 2,439.3 2,450.0 2,365.2 Inventory days 31 35 32 32
Capital WIP 479.0 450.0 450.0 350.0 Debtor days 9 11 11 11
Total Fixed Assets 2,914.5 2,889.3 2,900.0 2,715.2 Creditor days 64 68 68 72
Net Intangible Assets 22.0 22.0 22.0 22.0 Return Ratios (%)
Other Investments 654.1 804.1 904.1 1,004.1 RoE 91.8 97.7 116.2 145.6
Liquid Investments 0 650 800 800 RoCE 101.4 132.6 152.5 185.0
Inventory 2,602.7 3,022.2 3,030.4 3,354.7
Debtors 782.9 906.7 994.3 1,100.7 Valuation Ratios (x)
Loans and Advances 657.3 690.8 757.6 838.7 P/E 40.6 43.2 34.9 30.3
Investments & Other CA 59.3 69.1 66.3 73.4 EV / EBITDA 33.2 30.8 26.9 23.6
Cash 2,537.6 1,205.1 1,674.5 2,243.7 EV / Net Sales 5.7 5.5 5.0 4.5
Total Current Assets 9,263.5 8,484.4 9,364.1 10,756.1 Market Cap / Sales 5.8 5.6 5.1 4.6
Creditors 5,288.9 5,871.8 6,439.6 7,548.0 Price to Book Value 47.0 46.8 47.0 50.6
Provisions & other CL 3,493.9 3,756.2 4,356.2 4,822.3 Solvency Ratios
Total Current Liabilities 8,782.8 9,628.0 10,795.8 12,370.3 Debt/EBITDA 0.0 0.0 0.0 0.0
Net Current Assets 480.7 -1,143.6 -1,431.6 -1,614.2 Debt / Equity 0.0 0.0 0.0 0.0
Others Non-Current Assets 779.4 804.4 829.4 854.4 Current Ratio 0.8 0.8 0.7 0.7
Application of Funds 4851.2 4027.2 4024.9 3782.6 Quick Ratio 0.5 0.4 0.4 0.4
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

 ICICIdirect.com coverage universe (FMCG)

CMP M Cap EPS (|) P/E (x) Price/Sales (x) RoCE (%) RoE (%)
Sector / Company (|) TP(|) Rating (| Cr) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E
Colgate (COLPAL) 909 1,018 Hold 26,528 22.3 25.5 29.2 40.7 35.7 31.2 6.3 5.7 5.0 95.6 92.8 91.4 69.1 65.8 65.2
Dabur India (DABIND) 248 325 Buy 51,268 7.6 8.1 9.2 32.7 30.8 27.1 5.5 4.9 4.4 32.5 29.5 28.7 31.4 27.6 26.4
GSK CH (SMIBC) 5,923 7,193 Buy 24,813 159.9 175.7 205.6 37.0 33.7 28.8 5.4 4.8 4.2 35.7 36.2 36.9 25.8 26.1 26.4
Hindustan Unilever (HINLEV) 814 1,000 Buy 175,817 18.7 23.2 26.7 43.4 35.1 30.4 5.6 5.1 4.6 132.6 152.5 185.0 97.7 116.2 145.6
ITC Limited (ITC) 315 387 Buy 268,607 12.7 14.6 15.3 24.8 21.6 20.6 7.2 6.3 5.8 45.8 48.9 50.5 32.5 36.0 35.9
Jyothy Lab (JYOLAB) 276 300 Hold 5,649 8.9 9.7 11.1 31.2 28.5 24.9 3.6 3.2 2.9 12.9 15.6 20.8 16.4 17.5 19.2
Marico (MARIN) 220 500 Buy 26,152 9.9 12.2 14.1 22.2 18.0 15.6 4.1 3.8 3.4 37.2 37.1 35.2 28.3 28.6 27.5
Nestle (NESIND) 5,465 7,240 Buy 59,568 45.9 116.2 159.1 119.0 47.0 34.4 6.8 5.4 4.9 25.1 35.5 45.6 28.0 39.2 51.2
Tata Global Bev (TATTEA) 123 132 Hold 7,942 5.4 7.4 8.0 22.5 16.5 15.3 0.9 0.9 0.8 7.6 9.2 9.3 6.1 7.9 8.1
VST Industries (VSTIND) 1,656 1,762 Hold 2,489 76.4 107.8 118.7 21.7 15.4 14.0 3.2 2.7 2.5 50.4 66.2 70.2 33.8 46.0 48.8
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 14

ANALYST CERTIFICATION
We /I, Sanjay Manyal, MBA (Finance), Parth Joshi, MBA (Finance) and Parineeta Rajgarhia, MBA (Finance), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the
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ICICI Securities Ltd | Retail Equity Research Page 15