HINDUSTAN UNILEVER LTD : Stock of the Decade !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 395.00; Buy at Rs. 375 - 385 levels. Medium term Target – Rs. 420; STOP LOSS – Rs. 353.00; Market Cap: Rs. 85,357.90 cr; 52 Week High/Low: Rs. 403.35 / Rs. 264.45

Total Shares: 216,09,59,717 shares; Promoters: 113,48,49,460 shares –52.52 %; Total Public holding: 102,61,10,257 shares – 47.48 %; Book Value: Rs. 12.19; Face Value: Rs. 1.00; EPS: Rs. 11.67; Div: 650 %; P/E: 33.84 times; Ind. P/E: 34.70; EV/EBITDA: 27.41

Total Debt: Rs. NIL cr; Enterprise Value: Rs. 85,770.65 cr.

HINDUSTAN UNILEVER LTD: The Company was founded in 1931 and is based in Mumbai, India. The company was formerly known as Hindustan Lever Limited and changed its name to Hindustan Unilever Limited in 2007.  Hindustan Unilever Limited, is a Fast Moving Consumer Goods (FMCG) company – it provides home and personal care products; foods and beverages in India and internationally. The company operates in 7 business segments. The company offers soaps and detergents, including soaps, detergent bars, detergent powders, detergent liquids, and scourers; and personal products - such as oral care, skin care, hair care, deodorant, talcum powder, and color cosmetic products, as well as Ayush services. It also provides beverages - including tea and coffee; foods, such as atta (flour), salt, and bread; culinary products comprising tomato and fruit based products, and soups; and ice creams, such as ice creams and frozen desserts. In addition, the company offers chemicals, such as glycerin and fine chemicals; agri commodities; and water purifiers, as well as exports marine and leather products. HUL has over 35 brands spanning 20 distinct categories. Its portfolio of brands includes the brand names like - 3 Roses, Annapurna, Brooke Bond, Taaza, Bru, Kissan, Knorr, Kwality Wall’s, Lipton, Modern, Red Label, and Taj Mahal brand names; personal products under the Aviance, Axe, Breeze, Clear, Clinic Plus, Closeup, Dove, Fair & Lovely, Hamam, LEVER Ayush Therapy, Lakme, Lifebuoy, Liril 2000, Lux, Pears, Pepsodent, Pond's, Rexona Soap, Sunsilk, and Vaseline brand names; and home care products under the Active Wheel, Cif, Comfort, Domex, Rin, Sunlight, Surf Excel, and Vim brand names and water purifiers under the brand name Pureit.

Investment Rationale:

Management indicated that there has been no down-trending witnessed in the market despite strong inflationary environment. Rural demand continues to remain strong and is likely to improve on back of good monsoon. Despite uncertain scenario and high inflation, management is confident of sustained growth in FMCG. Raw material cost coupled with rupee depreciation continues to remain a concern. However, the focus will be on maintaining consumer value proposition as against price hike to pass on the cost push. Further, it would continue to focus on cost saving programs. During the quarter, Soaps and Detergent witnessed some reduction in advertising spending. In Personal care, Packaged Foods and Beverages advertising spends were increased. Management clarified that lower ad-spend in Soap and Detergent does not indicate that the competitive intensity has reduced in the category.

Soaps and Detergent segment grew by 21.8 % driven largely by price increases. Detergent also posted a higher than industry growth. Premium portfolio in the soap segment continues to grow in double digit. Vim and Lux were relaunched during the quarter which also led to sharp growth. In the detergent portfolio, Surf, Rin and Wheel reported a double digit growth while in the soap portfolio Lux and Lifebouy grew in double digit.

Personal Products revenue grew by 18.2 % on back of strong double digit growth in Fair & Lovely, Vaseline and Ponds. Dove brand was expanded into face wash and nourishing oil care. It’s believed that Vaseline and Ponds would be the key growth driver in future in spite of their differentiated product strategy. HUL launched new products including Dove face wash; low unit SKUs in Dove oil care range helped the growth momentum. Packaged foods registered 21 % YOY revenue growth to Rs. 330 Cr due to relaunch of Kissan range and low unit pack of Kissan Soupy Noodles.

Bru World Café -

Hindustan Unilever in competition with US giants Starbucks (in collaboration with Tata Coffee) and Dunkin’ Donuts (in collaboration with Jubilant Foods) in coffee shop market segment has quietly opened a 'Bru World Café' outlet on pilot basis at JUHU - an up market western suburb of Mumbai. HUL wants to tap into increasing out – of - home consumption of coffee in the country. Bru World CafA will be bringing various coffee experiences across the globe to the Indian palette. With rising affluence in the country with the fact that consumers now spends more time at out of home point is the high potential of coffee retailing business. The organised coffee market in India is around Rs. 600 Cr or 20 % of the total domestic coffee consumption of Rs. 3,000 Cr and the coffee chain business is growing by 40 % in India. BRU was launched in 1962, which is Unilever’s only coffee brand sold in India. It’s believed that once this cafe is scaled up - HUL’s coffee shops can be served as point of purchases & which will help to create brand recall for in house consumption of its Bru brand to its customers. HUL faces competition from Nestle which has similar format called Café Nescafe; Café Coffee Day (a subsidiary of Bangalore based Amalgamated Bean Coffee Trading Company which runs 1,180 Café Coffe Day outlets ); Lavazza – Barista and Costa Coffee and Di Bella (Australia's premium coffee company planning to open 50 outlets in next 3 years by investing $441 million in this segment). HUL is the market leader in the overall coffee segment with a range of products in conventional coffee, ice & hot cappuccino & out of home vending space. It has roped in actors Shahid Kapoor & Priyanka Chopra as their brand ambassadors for BRU brand. Surely, with Macro – economic factors like higher per capita and disposable income which are the key sales trigger for coffee chains in the country. The per capita consumption of coffee in India is just 82 grams compare that with 4 kilos in US. There is a great opportunity for all players, given that collectively all the players have gone only to 200 cities in country of the potential 400 -500 cities that can offer growth. This will definitely help HUL in this segment. 

Outlook and Valuation:

HUL presented a fantastic Q2FY11 results with net sales at Rs. 5,610 Cr up by 17.8 % YoY. Domestic FMCG business grew by 19.8 % YoY due to strong growth in Soaps and Detergents. Everyone was surprised by a strong volume growth of 14 %. EBITDA margins expanded by 1.16 % to 14.7 % due to lower ad-spend and overheads. EBITDA was at Rs. 830 Cr up by 28 % YoY. Adjusted PAT at Rs. 650 Cr up by 22.2 %. Advertising spending remained at Rs. 650 Cr down by 1.96 % YoY. Though gross margins declined by 3.47 % YoY due to higher raw material price. HUL management indicated that cost pressures were managed through aggressive saving programs and price increase. Soaps & Detergent revenue grew by 21.8 % to Rs. 2,590 Cr and EBIT to Rs. 320 Cr. These margins are highest in the last six quarters. HUL re-launched its most famous soap brand LUX during the quarter and a strong double digit growth was witnessed in Laundry business. Personal Products reported a revenue growth of 18.2 % to Rs. 1,610 Cr and EBIT at Rs. 390 Cr up by 25.5 % YoY as margin expanded by 1.43 % to 24.4 %. Factoring higher volume growth and lower ad spend ratio, it is believed that in coming quarters the growth rates will improve on account of lower base (H2FY11 PAT grew by 6.5% YoY). While operating performance will continue to show improvement in the coming quarters, the sharp run-up in the stock price leaves little upside. But since the stock has broken its 15 years long consolidation, it will be the best performer for the forth coming decade. At the current market price of Rs. 395, the stock is trading at 32.91 x FY12E and 27.88 x FY13E respectively. Earnings per share (EPS) of company for FY12E and FY13E are seen at Rs. 12.00 and Rs. 14.20 respectively. One can buy HUL with a target price of Rs. 420.00 for Medium to Long term investment.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	17,725.30	19,735.20	23,121.80	25,933.00
NET PROFIT (Rs. Crs)	2,058.70	2,156.30	2,600.50	3,070.10
EPS (Rs.)	9.40	10.00	12.00	14.20
PE (x)	41.10	38.90	32.20	27.30
P/BV (x)	32.80	31.80	25.10	19.70
EV/EBITDA (x)	29.70	30.00	23.80	19.80
ROCE (%)	131.10	128.60	134.10	121.20
RONW (%)	88.60	82.70	87.10	80.80

I would buy HINDUSTAN UNILEVER LTD with a price target of Rs. 420 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 353.00 on every purchase.
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*As the author of this blog I disclose that I do hold HINDUSTAN UNILEVER LIMITED in my investment portfolio.