HINDUSTAN UNILEVER LTD : SMALL ACTIONS, BIG DIFFERENCE !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 863.75; Market Cap: Rs. 1,86,898.93 Cr; 52 Week High/Low: Rs. 981.00 / Rs. 553.35 

Total Shares: 216,38,08,180 shares; Promoters : 145,44,12,858 shares –67.23 %; Total Public holding : 70,93,95,322 shares – 32.78 %; Book Value: Rs. 15.15; Face Value: Rs. 1.00; EPS: Rs. 19.94; Div: 1300.00 % ; P/E: 43.31 times; Ind. P/E: 58.10; EV/EBITDA: 31.97.

Total Debt: ZERO Cr; Enterprise Value: Rs. 1,86,278.32 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. Unilever Ltd on November 17, 1956, offered 5,57,000 shares of Rs. 10 each to the public at par. In February 1980, in order to reduce the Non- Resident holding in the company to 51 %, Unilever Ltd offered for sale of 42,39,523 equity shares of Rs. 10 each at a premium of Rs. 9.50 per share, this was out of its shareholding in the company. Hindustan Unilever Ltd have given lucrative bonuses in the past. Company first gave bonus in the year 1979 in the ration of 1 new share for every 3 held; then in 1983 in the ratio of 3 new for 5 held; then in 1987 in the ratio of 1 new for 1 held and lastly in the year 1991 in the ratio of 1 new for every 2 held. The company had last split the face value of its shares from Rs. 10 to Re. 1 in the year 2000. Hindustan Unilever Limited, is a Fast Moving Consumer Goods (FMCG) company providing 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. As on March 31, 2013, Company had over 35 brands spanning 20 distinct categories. From April 01, 2013, Aquagel Chemicals Pvt Ltd becomes a subsidiary of Hindustan Unilever Ltd. On July 04, 2013, the parent company Unilever Plc raised its stake in HUL from 52.48 % to 67.28 %, by acquiring 31,95,63,398 shares representing 14.784 % in HUL via open offer priced at Rs. 600 per share. The company is locally compared with ITC, Godrej Consumer, Dabur India, Colgate, Marico, Emami, Godrej Ind, P&G, Gillette India, Bajaj Corp, Jyothy Labs, Amar Remedies, JHS Svendgaard, GKB Ophthalmics and Globally compared with Associated British Foods Plc of London, Colgate-Palmolive Co of New York, Kimberly-Clark Corp of USA, Procter & Gamble Co of USA, Nestle S.A of Europe, Pepsico Inc of USA, Coca- Cola Co of USA, Mondelez International Inc of USA (earlier known as Kraft Foods Inc which acquired Cadbury’s), Heineken Nv of Amsterdam, Starbucks Corp of USA, McDonald’s Corp of USA, Yum! Brands Inc of USA, Danone of Paris, Asahi Group Hld Ltd of Japan, and Kerry Group of Dublin.

Investment Rationale: 

HINDUSTAN UNILEVER LTD is a play on consumption growth in India. Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company with a heritage of over 75 years in India and touches the lives of two out of three Indians. HUL has over 35 brands spanning 20 distinct categories such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers, the Company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit. HUL is a subsidiary of Unilever, one of the world’s leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of about €49.8 billion in 2013. Unilever has about 67.23 % shareholding in HUL. The Company has over 16,000 employees and has an annual turnover of around Rs. 28,019.13 Cr (financial year 2013 – 2014). 

                             The Indian Fast Moving Consumer Goods (FMCG) sector is the fourth largest in the Indian economy and has a market size of $1,310 Cr. This industry primarily includes the production, distribution and marketing of consumer packaged goods, that is those categories of products which are consumed at regular intervals. The FMCG market is set to treble $3,340 Cr in 2016. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low indicating the untapped market potential. The Indian FMCG industry represents nearly 2.5 % of the country’s GDP. The industry has tripled in size in past 10 years and has grown at 17 % CAGR in the last 5 years driven by rising income levels, increasing urbanization, strong rural demand and favourable demographic trends. Food products and personal care together make up two-third of the sector’s revenues. Rural India accounts for more than 70 Cr consumers or 70 % of the Indian population and accounts for 50 % of the total FMCG market. With changing lifestyle and increasing consumer demand, the Indian FMCG market is expected to cross $8,000 Cr by 2026 in towns with population of up to 10 lakh.  With significant distribution scale, a portfolio of iconic brands and leading market share in many categories, we give India’s largest consumer products firm a narrow economic moat rating. Hindustan Unilever’s (HUL) products reach about 70 lakh outlets across India, the largest distribution network among peers. 19 of its brands generate annual turnover of over Rs. 500 Cr, or $ 8 Cr, each; while a good 95 % of products hold the two leading spots in their respective categories in terms of market share. To ensure that its dominance remains intact, the company is constantly investing in product innovation and supporting brands via the media. As the company innovates to bring new-to-India products to market and gains further scale benefits it is anticipate that HUL’s operating margins will expand over the coming decade, keeping returns above its cost of capital. HUL’s ability to innovate ahead of competition is truly remarkable. HUL has impressive ability to expand margins despite mounting competition in soap and detergents, which contributes 47 % to sales. This has been possible by launching new products such as fabric softeners, liquid detergents ahead of competitors. At the same time, its rural strategy of converting local villagers to salesmen has allowed them to access the interior regions of India, and sell them one rupee sachets of its products, keeping volumes buoyant. Personal products, contributes 28 % to sales & is a big opportunity for HUL to drastically improve its margins. The under-penetration characteristics of this category will allow HUL to leverage the breadth of its brands across price points, to lead adoption across affluent as well as poor households in India. Its recent launches of TRESemme and Tony & Guy brands, is a step in that direction to explore how far up the price band can be expanded in this luxury category. 

                                      Hindustan Unilever's (HUL) narrow economic moat stems from its portfolio of iconic brands--which allows the company to continue holding the top two spots in terms of market share across 95 % of its product categories, despite new entrants. In fact, eleven of the company's brands each drive over Rs. 1,000 Cr in annual sales, while another eight generate annual revenue in excess of Rs. 500 Cr each. Furthermore, HUL’s large retail distribution network which directly touches 32 lakhs outlets of India's estimated 85 lakhs retail outlets, and this is the largest coverage of universe in all of consumer India. Not only this, the secondary distribution of HUL’s products reaches over 80 % of all retail outlets in the country, making its products easily available across the country. HUL’s products play across the price points caters to the premium-mid-and-low end of the markets, and its premium brands are enjoying pricing power compared to its local brands of Marico in the body lotion category, and Godrej in soaps. Also when we give a snap shot look at HUL's 15 year financials, it turns out that it has been consistant in its returns. HUL's 15 years average of ROCE comes at 99.85 % & 15 year average of ROE comes at 89.67 %, its returns on invested capital (ROICs) which comes to an average 53 % over the next five years, well over its 10.9 % estimated cost of capital, supporting HUL's narrow economic moat. Here is HUL's 15 years financial snap shot - 

YEARS	EPS(Rs.)	P/E(x)	BV(Rs.)	Div/Sh(Rs.)	ROCE(%)	ROE(%)
1999	4.86	46.29	9.55	2.90	65.00	51.00
2000	5.95	34.68	11.30	3.50	66.70	52.67
2001	7.46	29.97	13.82	5.00	61.50	50.64
2002	8.04	22.60	16.62	5.16	58.05	48.38
2003	8.05	25.42	09.71	5.50	59.13	82.87
2004	5.44	26.37	09.50	5.00	45.08	57.23
2005	6.40	30.82	10.47	5.00	67.66	61.09
2006	8.41	25.74	12.34	6.00	65.89	68.14
2007	8.73	24.50	06.61	9.00	138.72	122.97
2008	11.46	20.72	09.45	7.50	135.55	120.30
2009	11.47	21.86	09.45	7.50	118.59	121.34
2010	10.10	23.63	11.84	6.50	106.78	85.25
2011	10.58	26.89	12.19	6.50	102.66	86.70
2012	12.46	32.89	16.25	7.50	95.40	76.61
2013	17.56	30.21	12.37	18.50	163.59	141.98
2014	17.88	32.01	15.15	13.00	147.56	118.01

Looking forward, it can be expected that HUL's free cash flow will roughly equals its annual earnings in the future, as it has done in the past. And, it can be expected that its ROIC's to remain above the Cost of Capital (COC) for at least the next decade, given its strong brands with pricing power, negative working capital cycle, and low acquisition strategy in India. HUL had already given two Buybacks till now, one was in October 2007 where HUL bought back 3,02,35,772 equity shares of Re. 1 each at an average price of Rs. 207.13, spending Rs. 626.27 Cr (approved not more than Rs. 230). The second buyback came in June 2010 where HUL bought back 2,28,83,204 equity shares of Re. 1 each at an average price of Rs. 273.25 spending Rs. 625.29 Cr (approved not more than Rs. 280). So, looking at its strong cash flows and with the Free Reserves of at Rs. 3,507.76 Cr (as on 31 March 2015), another buyback can be expected at around Rs. 700 per share, and company may utilize around Rs. 930 Cr for this buyback. A buyback improves many financial metrics like ROE & EPS. Both of these metrics have number of shares as denominator & buybacks reduces number of shares, thus increasing ROE & EPS. Goods and Service Tax (GST) will replace the multiple indirect taxes levied on FMCG sector with a uniform, simplified and single-pint taxation system and this is likely to be implemented soon & the benefits are likely to come in by the end of FY’16. The rate of GST on services is likely to be 16 % and on goods is proposed to be 20 %. A swift move to the proposed GST may reduce prices, bolstering consumption for FMCG products. While the rural market certainly offers a big attraction to marketers, it would be naïve to think that any company can enter the market without facing any problems and walk away with a sizable share. Distribution is the most important variable in the marketing plans of most consumer goods manufacturers, because managing such a massive sales and distribution network is in itself a huge task. This sector will continue to see growth as it depends on an ever-increasing internal market for consumption, and demand for these goods remains more or less constant, irrespective of recession or inflation. Hence this sector will grow, though it may not be a smooth growth path, due to the present world-wide economic slowdown, rising inflation and fall of the rupee. This sector will see good growth in the long run and hiring will continue to remain robust.

Outlook and Valuation:

HUL is the largest company in the FMCG industry, with market leadership in soaps, detergents and personal care categories. The company is a subsidiary of Anglo Dutch FMCG giant Unilever. It has over 35 brand spanning 20 distinct categories; the company is a part of the everyday life of millions of consumers across India. It has strong brands, with market leadership in most of the categories it operates in. It has a large distribution network with direct reach of over 1m retail outlets. The FMCG Industry is characterized by a well-established distribution network, low penetration levels, low operating cost, lower per capita consumption and intense competition between the organized and unorganized segments. In the last decade the FMCG sector has grown at an average of 11 % a year; in the last five years, annual growth accelerated to 17 % and last year it grew 5 %. Within this, urban growth was 4 % and rural growth was 8 % as per Ac Nielson MAT numbers. The rural India accounts for 70 % of India’s population with 56 % of National Income and commands 64 % of total expenditure and one third of the total savings. The Indian FMCG sector is the fourth largest sector in the Indian economy. Indian rural markets contribute around 45 % in HUL sales. 

                                                HUL did its first-of-its-kind deal with the music channel MTV- a part of Viacom 18 media group for five of its best-selling brands. The deal will help HUL to showcase its brands in six 60-minute movies, one aired every month on Viacom 18's youth and music platform. Each movie is directed by a Bollywood’s young directors like Anurag Basu for Sunsilk; Nikhil Advani for Ponds; Rohan Sippy for Tresemme; Abhinay Deo for Lakme; Anurag Kashyap & Shoojit Sircar for Close up. The agreement would include not just the movies themselves but interviews with directors, on-ground and on-air promotions of the films, airtime for ads etc. The Elements of these movies such as songs and trailers of the movies are likely to give a boost to HUL. The deal size is being pegged by industry insiders around Rs. 20-25 crore, all inclusive. With the launch of MTV Movies, HUL will redefine the way in which brands tell their stories to consumers. These will focus on communicating the brand purpose and build brand love. 

                                                  On Financial side HUL’s Performance was quite satisfactory. During Q4FY15, HUL’s Revenues jumped 8.2 % YoY to Rs. 7,680 Cr. Domestic consumer business grew by 8.9 % led by 6 % volume growth and 3 % jump in price realization. The Operating profit increased 22.3 % YoY to Rs. 1,320 Cr. The operating margins grew 2.00 % YoY to 17.2 % led by 2.70 % drop in Raw Material costs and 0.50 % decrease in other expenses and 0.30 % decline in employee cost. However, this decrease was partially offset by 1.50 % increases in Advt & Promotional spends. Net profit increased by 23.4 % YoY to Rs. 1,020 Cr. Excluding exceptional gains of Rs. 180 Cr related to property sale, the Adj. PAT increased 3.0 % YoY to Rs. 900 Cr. Other segments reported satisfactory performance during the quarter – Beverages segment reported 12.3 % YoY growth in revenues to Rs. 980 Cr and 11.4 % YoY jump in EBIT to Rs. 180 Cr and Processed Food recorded 13.6 % YoY increase in revenues to Rs. 480 Cr and 10.6 % growth in EBIT to Rs. 25.4 Cr. HUL’s all three detergent brands – Surf, Rin and Wheel have crossed Rs. 2,000 Cr mark. Lifebuoy and FAL also crossed Rs. 2,000 Cr mark. Magnum Ice-cream extended to Delhi and Kolkata & now has presence in 7 cities. One of the HUL's newest products Pureit achieved its break even. The company is witnessing the momentum coming back in Close Up. The business environment for HUL continues to be challenging with slowing growth being witnessed on both the value front and volume fronts. The overall competitive intensity has stepped up in various categories while the up-trending has come to a pause. The discretionary category which was outpacing the other category over a longer term has come to a pause, but the company believes it to be a short-term phenomenon. HUL has a robust product pipeline, and has a strong and lucrative personal products portfolio, and expanding distribution network. HUL is also a good play because it has a revenue growth from a medium to long term perspective, however due to increase in royalty, steep hike in tax rate and slowdown in discretionary segments remains an overhang on this stock. Depreciation in rupee impacts price of imported raw materials. The price war in HUL’s popular segments with new entrants entering the fray could hit the company hard. HUL pay’s rich dividends and one can hold this stock from a three five year perspective and focus on new product launches and market share gains in existing categories. Also there could be another buyback at around Rs. 700 per share. At current price of Rs. 863.75 the stock is trading at P/E of 41.92x FY16E on EPS of Rs. 20.60 and 34.96x FY17E on the EPS of Rs. 24.70. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	28,019.10	30,734.10	34,442.60	39,602.50
NET PROFIT (₹ Cr)	3,555.30	3,837.20	4,456.80	5,342.90
EPS (₹)	16.40	17.70	20.60	24.70
PE (x)	54.50	50.50	43.40	36.20
P/BV (x)	59.10	52.00	47.90	38.10
EV/EBITDA (x)	42.20	37.40	30.70	25.80
ROE (%)	119.50	109.60	114.70	117.00
ROCE (%)	88.20	94.40	98.10	92.30

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*As the author of this blog I disclose that I do hold Hindustan Unilever Ltd in my investment portfolio.

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