Hindustan Unilever (HUL) reported revenue growth of 13.2% and operating profit growth of 21.3% for Q1FY15, ahead of estimates. Volume growth was 6% with strong growth across segments like soaps & detergents and personal products. Operating margins expanded for the 12th straight quarter due to lower costs. While results were positive, growth may slow in coming quarters due to rural slowdown and competition. The report recommends buying on dips.

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HDFC sec Scrip code Industry CMP (Rs.) Recommended Action Entry price band (Rs.)* Target (Rs.) Time Horizon
HLLLTDEQNR FMCG 704.1 Buy on dips 620‐641 694 1 quarter
*Applicable till the next results are announced
Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods company, with leadership in Home & Personal Care Products. It is the market leader
across diverse FMCG categories and has powerful brands like Rin, Surf Excel, Lux, Lifebuoy, and Ponds in its portfolio.
HUL’s Q1FY15 revenue growth was in line, while operating profit & PAT growth were ahead of our estimates. We present an update on the stock.
Q1FY15 Results Review
Y‐o‐Y
Net sales grew by 13.2% Y‐o‐Y to Rs. 75.71 bn [Q1FY14: Rs. 66.87 bn]. The Domestic Consumer business grew at 13.4% with decent volume growth of 6% (adjusting for
transport strike in Q1FY14, volume growth stood at 5%). Home and Personal Care (HPC) reported growth of 13.3% Y‐o‐Y with personal products growing by 14.7% and
Soaps & Detergents segment reporting growth of 12.9%. Foods business grew by 13.4%, helped by healthy growth reported by packaged foods (up 18.8%). Others
category (which includes Exports, Chemicals & Water) grew by 8.5%.
Gross margins fell by 60 bps Y‐o‐Y, led by higher raw material prices. However, operating profit grew at a healthy rate by 21.3%, while OPM improved by 112 bps Y‐o‐Y
to 17.1% (12th straight quarter of margin expansion), driven by lower employee cost (down 1.8% Y‐o‐Y), A&P spends (down 82 bps Y‐o‐Y to 12.2%) and relatively lower
growth in other expenses (up 11.9% Y‐o‐Y, led by cost rationalisation). On a segmental basis, Soaps & Detergents, Personal Products & Packaged foods witnessed
margin expansion, while Beverages witnessed contraction in PBIT margins.
Reported PAT grew at a lower rate by 3.7% Y‐o‐Y, impacted by lower other income (down 14.6%), lower exceptional items (down 66.2%) & higher effective tax rate (up
750 bps Y‐o‐Y). Adjusted PAT (excluding one‐off gains) grew by 9.9% Y‐o‐Y. EPS (Adj.) for Q1FY15 stood at Rs. 4.8 vs. Rs. 4.3 in Q1FY14.
Q‐o‐Q
Sequentially, the results were decent. The Net sales grew by 9.2%, operating profit grew by 22.2%. Reported PAT grew by 21.2%, while adjusted PAT grew by 24.7%.
OPM & PAT margins improved by 187 bps & 170 bps Q‐o‐Q.
The revenue growth was driven by strong growth from packaged foods (up 29.6% Q‐o‐Q) and healthy growth from personal products and soaps & detergents
segments (up 8.9% & 10% Q‐o‐Q) respectively. However, Beverages underperformed (down 3.7% Q‐o‐Q). Profit‐wise, other than beverages (which witnessed
sequential margin contraction) all the business segments witnessed margin expansion.
RETAIL RESEARCH Aug 05, 2014Hindustan Unilever Ltd. (HUL) – Q1FY15 Result

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Quarterly Financials:
(Rs. in Million)
Particulars Q1FY15 Q1FY14 VAR [%] Q4FY14 VAR [%] Remarks
Net Sales 75707.8 66874.9 13.2 69358.2 9.2
The Domestic Consumer business grew at 13.4% with decent volume growth of 6%
(adjusting for transport strike in Q1FY14, volume growth stood at 5%). Home and Personal
Care (HPC) reported growth of 13.3% Y‐o‐Y with personal products growing by 14.7% and
Soaps & Detergents segment reporting growth of 12.9%. Foods business grew by 13.4%,
helped by healthy growth reported by packaged foods (up 18.8%). Others category (which
includes Exports, Chemicals & Water) grew by 8.5%.
Other Operating Income 1455.6 1215.5 19.8 1582.8 ‐8.0
Total Operating Revenue 77163.4 68090.4 13.3 70941 8.8
Total Expenditure 63998.0 57234.4 11.8 60165.5 6.4
(Inc) / Dec. in Stock in Trade ‐146.5 1077.5 ‐ ‐1298.7 ‐
Cons. of Raw / Packaging. Material 31028.2 26252.3 18.2 29100.4 6.6
Material Cost / Net Sales increased by 55 bps Y‐o‐Y, but fell 89 bps Q‐o‐Q to 51.7%. Gross
margins fell on Y‐o‐Y due to input cost inflation. However, it improved on Q‐o‐Q basis.
Purchase of Goods 9014.6 7498.2 20.2 9506.6 ‐5.2
Advertising & Promotions 9448.8 8897.8 6.2 8403.4 12.4 A&P cost / Net Sales declined by 82 bps Y‐o‐Y, but rose 39 bps Q‐o‐Q to 12.2%.
Employees Cost 3356.7 3416.8 ‐1.8 3782.5 ‐11.3
Employee benefit expense for the quarter includes a one‐time credit of an amount of Rs.
324.4 mn on account of adjustments for un‐utilized pension corpus relating to earlier
periods. (Q1FY14: Nil)
Other Expenditure 11296.2 10091.8 11.9 10671.3 5.9
Operating Profit 13165.4 10856.0 21.3 10775.5 22.2
Other Income 2417.5 2830.0 ‐14.6 2166.6 11.6
Other income includes interest, dividends & net gain on sale of other non trade current
investments Rs. 881 mn (Q1FY14: Rs. 797.4 mn), net gain on sale of non current
investments Rs. 1062.2 mn (Q1FY14: Rs. 727.5 mn) and interest on income tax refunds of
Rs. 77.9 mn (Q1FY14: Rs. 242.6 mn).
EBIDTA 15582.9 13686.0 13.9 12942.1 20.4
Interest 62.5 62.2 0.5 53.3 17.3
PBDT 15520.4 13623.8 13.9 12888.8 20.4
Depreciation 667.2 664.4 0.4 657.7 1.4
PBT 14853.2 12959.4 14.6 12231.1 21.4
Tax (incl. DT & FBT) 4284.7 2766.9 54.9 3509.8 22.1
The effective tax rate on PBT increased by 750 bps Y‐o‐Y & 15 bps Q‐o‐Q to 28.8% on the
back of some of the facilities coming out of tax benefits. The effective tax rate for FY15 is
expected to be 29‐30%.
Reported PAT 10568.5 10192.5 3.7 8721.3 21.2
Y‐o‐Y PAT growth was impacted by lower other income, lower exceptional items & higher
effective tax rate.
Extr. Ord. Items [gain /(loss)] 282.1 835.7 ‐66.2 470.8 ‐40.1
Exceptional items, net credit in Q1FY15 include profit on sale of surplus properties Rs.
401.5 mn (Q1FY14: 1062.5 mn) and restructuring expenses Rs. 5.1 mn (Q1FY14: Rs Nil).
Adjusted PAT 10286.4 9356.8 9.9 8250.5 24.7
EPS 4.8 4.3 9.9 3.8 24.7

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Equity 2163.1 2162.5 0.0 2162.7 0.0
Face Value 1.0 1.0 0.0 1.0 0.0
OPM (%) 17.1 15.9 7.0 15.2 12.3
OPM expansion on Y‐o‐Y basis (for 12th
straight quarter) was driven by lower employee
costs, A&P spends and relatively lower growth in other expenses.
PBIT (%) 19.3 19.1 1.1 17.3 11.6
PATM (%) 13.3 13.7 ‐3.0 11.6 14.6
(Source: Company, HDFC Sec)
Segmental Results:
Quarterly:
(Rs. in Million)
Particulars Q1FY15 Q1FY14 VAR [%] Q4FY14 VAR [%] Remarks
Segment Revenue
Soaps & Detergents 38475.8 34076.6 12.9 34971.2 10.0
• Segment witnessed broad based double digit growth. In Skin Cleansing, Dove, Pears, Lux,
Lifebuoy, Liril and Hamam grew well. There was a step up in price growth as judicious pricing
actions were taken to manage input cost inflation. Lux was re‐launched during the quarter
with improved product sensorials and aesthetics.
• In Laundry, growth was led by the premium segment with Surf sustaining its strong growth
momentum and Rin accelerating across both powders and bars. Wheel continued to show
improved growth post its re‐launch at the end of last year.
Personal Products 21595.6 18833.8 14.7 19832.9 8.9
• Personal Products had strong growth in challenging environment. In Skin Care, growth
stepped up with FAL, Pond's and Lakme delivering double digit growth. Hair Care delivered
another quarter of volume led double digit growth driven by Dove, with Clinic Plus doing well
and TRESemmé continuing to make good progress.
• In Oral Care, Close Up delivered double digit growth with re‐launch of core & introduction of
the new ‘Diamond Attraction' variant. Colour Cosmetics maintained its high growth
momentum across both Lakme and Elle 18.
Beverages 8365.6 7573.7 10.5 8690.4 ‐3.7
• Tea delivered a strong volume led performance, driven by strengthened brand equities and
focused in‐market activities. In Coffee, growth stepped up on the core and Bru Gold
continued to do well.
Packaged Foods (including
ice cream)
5437.8 4578.8 18.8 4196.8 29.6
• Growth was led by strong performance from Kissan, Knorr, Kwality Walls and Magnum, which
grew in double digit. Market development activities continued to be the key driver of growth.
• Knorr growth was led by instant soups, which grew more than 2x. Ice creams recorded one of
its strongest quarters, driven by Magnum and sharper in‐market execution on Kwality Walls
during an extended summer season.
Others (includes Exports,
Chemicals & Water)
3029.1 2790.8 8.5 2957.9 2.4
Total 76903.9 67853.7 13.3 70649.2 8.9

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Segment Results
Soaps & Detergents 5318 4393.2 21.1 4217.1 26.1
Personal Products 5966.5 4681.6 27.4 4958.1 20.3
Beverages 1362.5 1386.8 ‐1.8 1630.4 ‐16.4
Packaged Foods 590.5 383.9 53.8 229.6 157.2
Others (includes Exports,
Chemicals & Water) ‐154.5 ‐30.8 ‐ ‐250.5 ‐
Total 13083.0 10814.7 21.0 10784.7 21.3
EBIT Margin (%) bps bps
Soaps & Detergents
13.8 12.9 93 bps 12.1 176 bps
Segment margins improved despite input cost inflation on the back of price hikes &
premiumization
Personal Products 27.6 24.9 277 bps 25.0 263 bps
Recovery in FAL and lower spends on media and promotional activities aided margin expansion
in personal products segment.
Beverages 16.3 18.3 ‐202 bps 18.8 ‐247 bps Margin contraction was led by higher input cost.
Packaged Foods 10.9 8.4 247 bps 5.5 539 bps Margin expansion in the packaged foods segment was encouraging.
Others (includes Exports,
Chemicals & Water)
‐5.1 ‐1.1 ‐400 bps ‐8.5 337 bps
Total PBITM 17.0 15.9 107 bps 15.3 175 bps
Capital Employed
Soaps & Detergents ‐4342.4 ‐6071.4 ‐ ‐2309.1 ‐
Personal Products ‐6160.3 ‐4535.2 ‐ ‐4750.9 ‐
Beverages 2435.9 1624.3 50.0 3473.5 ‐29.9
Packaged Foods 1574.1 1642.4 ‐4.2 1742.8 ‐9.7
Others (includes Exports,
Chemicals & Water) ‐105.2 ‐614.6 ‐ ‐216 ‐
Total ‐6597.9 ‐7954.5 ‐ ‐2059.7 220.3
Other Unallocable Items 50038.3 44887.2 11.5 34830.2 43.7
Total 43440.4 36932.7 17.6 32770.5 32.6
(Source: Company, HDFC Sec)
Other Highlights of the concall
The management said that it is seeing pressure in volume and value across category in FMCG. Premium and discretionary category are under pressure. Input costs are
also high. Competition activities remain high despite lower media intensity.
The management said that sachet is growing faster than bottle packs. Also, consumers are buying premium products but go for small packs.
The company is seeing the urban and rural growth gap narrowing down. Both in urban and rural India, consumers are moving to smaller packs.

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Conclusion & Recommendation:
HUL’s Q1FY15 revenue growth was in line, while operating profit & PAT growth were ahead of our estimates. Volume growth of 6% Y‐o‐Y was healthy in a challenging
environment. Infact it was the highest in the last 5 quarters, which was encouraging. Selective price hikes further supported the overall revenue growth. We were happy
with the double digit growth reported by all its key business segments, especially soaps & detergents & personal products. The revenue growth of Soaps & Detergents
was the highest in the last five quarters and the segment profitability improved significantly, driven by price hikes (in soaps) and premiumization (in laundry). Robust
revenue & profit growth in personal products was also encouraging, aided by recovery in FAL and lower spends on media and promotional activities. Growth in packaged
foods was also impressive. 12th straight quarter of margin expansion (on an overall basis) was a positive highlight of quarter, led by lower employee cost, lower Ad
spends & cost cutting initiatives across the supply chain.
We clearly see a recovery in growth of HUL’s business segments, which is a positive sign. However, we continue to remain cautious in the coming quarters on account of
slowing rural growth, intensifying competition, weak monsoon and slowdown in discretionery spends (which could impact the packaged foods segment). Price
sensitiveness and increased competition from global majors such as P&G and L’Oréal could limit a speedy recovery in Personal Products segment (though gradually
recovery cannot be ruled out). The recovery in the overall volume growth is likely to be gradual (could remain in mid to high single digits over the next one year), unless
the economic growth picks up sharply in the next few months (gradual recovery expected from H2FY15). Volume growth would continue to remain a key focus area for
the company.
While firming PFAD prices & volatile rupee could continue to put pressure on the margins, we expect the OPM to gradually expand over the next two quarters on the
back of cost cutting initiatives. We would continue to monitor the trends in margins going forward. Expected rise in tax rates and phased increase in royalty could keep
EPS growth muted in the near future.
In a scenario of slowdown in consumer spending, the company has limited scope for price hikes, if the input cost inflation persists. Hence improvement in volume growth
is essential. We feel HUL would be able to meet our revenue projections for FY15. Hence we are keeping the same unchanged. However, on profit front, the company
could surpass our estimates at the operating & net level. Hence we are enhancing our operating profit & PAT estimates by 4.8% & 1.2% respectively. Accordingly, revised
EPS for FY15 is estimated at Rs. 18.6. We have incorporated projections for FY16, wherein we expect Net Sales & PAT to grow by 12% & 12.9% respectively. EPS for FY16
is estimated at Rs. 21.
Unilever now has a 67.3% holding in HUL. As it intends to increase its stake to 75%, the stock price may not materially fall. However upsides also remain restricted till the
economic slowdown comes to an end and cost pressures ease. HUL also faces headwinds like deceleration in rural growth, increased competition intensity and probable
drought in parts of India due to ‘El Nino’.
In our Q4FY14 Result Review dated May 02, 2014, we recommended investors to buy HUL on dips to Rs. 525‐543 for a price target of Rs. 589 over the next quarter.
Thereafter, the stock touched a low of Rs. 550.3 on May 08, 2014 and subsequently touched a high of Rs. 708.9 on Aug 05, 2014. HUL remains a core portfolio holding
despite recent underperformance. At CMP, HUL trades at 33.5xFY15E EPS. Valuing the stock at 33xFY16E EPS, we arrive at price target of Rs. 694. We feel the valuations
are stretched at current levels. Hence one should buy the stock only on dips to Rs. 620‐641 (29.5‐30.5xFY15E EPS) to earn decent returns over the next quarter.

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Financial Estimations: (Quick Estimates)
(Rs. in Million)
Particulars FY12 FY13 FY14 FY15 (OE) FY15 (RE) FY16E
Total Operating Revenue 221164 258102 280191 314776 314776 352549
Operating Profit 32568 40038 44753 49560 51938 59580
Adjusted PAT 25992 33276 36927 39829 40291 45479
Adjusted EPS 12.0 15.4 17.1 18.4 18.6 21.0
OPM (%) 14.7 15.5 16.0 15.7 16.5 16.9
PATM (%) 11.8 12.9 13.2 12.7 12.8 12.9
PE 58.6 45.8 41.2 38.2 37.8 33.5
*OE = Original Estimates; RE = Revised Estimates (Source: Company, HDFC Sec Estimates)
Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
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