hindustan unilever - Edelweiss

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KEY DATA

Rating BUY Sector relative Outperformer Price (INR) 2,143 12 month price target (INR) 2,805 Market cap (INR bn/USD bn) 5,036/68.5 Free float/Foreign ownership (%) 38.1/14.5

What’s Changed

Target Price ⚊

Rating/Risk Rating ⚊

INVESTMENT METRICS

Clearing the air: Decent recovery all over

Hindustan Unilever (HUL) has underperformed Nifty and many consumer peers over the past two quarters. The stock has corrected 12% from its recent peak owing to concerns around: i) weaker volume growth – at least optically – than Dabur, Emami, Marico, etc; ii) sharp inflation in raw materials such as palm oil and tea, and packaging costs; and iii) investor perception that the latest union budget would hit rural

FMCG growth. In this report, we have addressed the top 13 questions that most investors are grappling with regarding HUL.

In the near term, an improving portfolio mix combined with HUL’s cost control, price hikes and synergies from the GSK takeover should abate concerns on raw material inflation. Retain ‘BUY’ with a TP of INR2,805.

FINANCIALS (INR mn)

Year to March FY20A FY21E FY22E FY23E

Revenue 3,97,830 4,59,119 5,05,502 5,51,407

EBITDA 98,610 1,14,194 1,33,111 1,50,644

Adjusted profit 67,640 78,723 97,474 1,12,944

Diluted EPS (INR) 31.2 33.5 41.5 48.1

EPS growth (%) 11.6 7.2 23.8 15.9

RoAE (%) 84.0 34.5 25.9 29.7

P/E (x) 69.2 64.6 52.1 45.0

EV/EBITDA (x) 50.9 43.7 37.4 32.9

Dividend yield (%) 1.2 1.7 1.5 1.8

PRICE PERFORMANCE

Top 13 issues unnerving investors

1. Why is HUL’s recent volume growth weaker than many peers? 2. In an inflationary scenario, what happens to gross margins and volume growth? 3. Can rural growth derail in the wake of the Union Budget? 4. How will laggard categories such as discretionary portfolio, out-of-home

products and detergents perform over coming quarters? 5. What is the outlook for the foods segment? Any benefit of a pickup in in-home

consumption? 6. HUL does not seem to have delivered in naturals? 7. Will Sebamed’s aggression impact Dove? 8. How does the ‘Innovation funnel’ look like given sanitisers have cooled off? 9. How is the growth potential in HUL’s segments? 10. What is HUL doing to drive premiumisation? 11. Can HUL be nimble enough to compete with start-ups? 12. How will modern trade, Urban recovery help HUL? 13. How is HUL faring on e-commerce? We shed light of these concerns at length on inside pages, and argue the stock offers

a good opportunity given the concerns – valid or otherwise – are priced in post-

recent correction. Higher mobility, consumer relevant innovation and investments

into market development would drive recovery in HUL’s volume growth.

Explore:

Outlook and valuation: On a firm footing; maintain ‘BUY’

We remain positive on HUL's ability to outgrow the market, as well as its pricing

power underpinned by distribution expansion, deepening direct reach and product

innovation initiatives. The ongoing demand shift from the smaller players to HUL will

continue especially in Tea, soaps. The merger of GSK portfolio with HUL has begun

to yield revenue delta; we believe the larger story will be innovation and new

products in HFD and allied categories.

We expect HUL to be a key beneficiary of the rural demand and recovery in out of

home consumption. In terms of the covid-19 related impact, we believe the worst is

behind and, hence, expect volumes and earnings to improve. Retain ‘BUY/SO’ with

a TP of INR2,805. The stock is trading at 52.1x FY22E EPS.

0

15

30

45

60

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Consumer Staples HUVR IN Equity

25,000

30,600

36,200

41,800

47,400

53,000

1,825

1,960

2,095

2,230

2,365

2,500

Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

HUVR IN Equity Sensex

India Equity Research Consumer Staples March 3, 2021

HINDUSTAN UNILEVER COMPANY UPDATE

Abneesh Roy Tushar Sundrani Prateek Barsagade +91 (22) 6620 3141 +91 (22) 6620 3004 +91 (22) 4063 5407 [email protected] [email protected] [email protected]

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HINDUSTAN UNILEVER

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Financial Statements

Income Statement (INR mn) Year to March FY20A FY21E FY22E FY23E

Total operating income 3,97,830 4,59,119 5,05,502 5,51,407

Gross profit 2,15,240 2,50,692 2,79,900 3,07,853

Employee costs 18,200 25,702 25,916 26,822

Other expenses 47,130 47,129 55,924 60,999

EBITDA 98,610 1,14,194 1,33,111 1,50,644

Depreciation 10,020 10,344 10,419 10,381

Less: Interest expense 1,180 1,270 1,320 1,300

Add: Other income 6,320 5,887 8,940 12,031

Profit before tax 93,730 1,08,466 1,30,312 1,50,994

Prov for tax 24,090 27,333 32,839 38,051

Less: Other adj (2,000) (2,410) 0 0

Reported profit 67,640 78,723 97,474 1,12,944

Less: Excp.item (net) 0 0 0 0

Adjusted profit 67,640 78,723 97,474 1,12,944

Diluted shares o/s 2,165 2,349 2,349 2,349

Adjusted diluted EPS 31.2 33.5 41.5 48.1

DPS (INR) 26.2 36.9 33.2 38.5

Tax rate (%) 25.7 25.2 25.2 25.2

Important Ratios (%) Year to March FY20A FY21E FY22E FY23E

Other exp (% of rev) 12.9 13.9 12.8 12.6

Con A&P (% of rev) 12.0 10.4 11.2 11.2

Gross margin (%) 54.1 54.6 55.4 55.8

EBITDA margin (%) 24.8 24.9 26.3 27.3

Net profit margin (%) 17.0 17.1 19.3 20.5

Revenue growth (% YoY) 1.4 15.6 10.2 9.1

EBITDA growth (% YoY) 11.0 15.8 16.6 13.2

Adj. profit growth (%) 11.6 16.4 23.8 15.9

Assumptions (%) Year to March FY20A FY21E FY22E FY23E

GDP (YoY %) 4.8 (6.0) 7.0 6.0

Repo rate (%) 4.4 3.5 3.5 4.0

USD/INR (average) 70.7 75.0 73.0 72.0

Volume gr. (overall) 2.0 1.0 7.0 7.0

Pricing gr. (overall) (0.6) 1.0 3.2 2.1

COGS % of sales (con) 45.9 45.4 44.6 44.2

Staff cost (% of rev) 4.7 5.7 5.2 4.9

Yield on cash 9.9 6.5 9.0 10.0

Dep (% of gross block) 14.1 11.8 10.8 10.8

Valuation Metrics Year to March FY20A FY21E FY22E FY23E

Diluted P/E (x) 69.2 64.6 52.1 45.0

Price/BV (x) 56.9 13.6 13.4 13.3

EV/EBITDA (x) 50.9 43.7 37.4 32.9

Dividend yield (%) 1.2 1.7 1.5 1.8

Source: Company and Edelweiss estimates

Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E

Share capital 2,165 2,349 2,349 2,349

Reserves 80,130 3,71,854 3,75,753 3,80,271

Shareholders funds 82,295 3,74,204 3,78,103 3,82,620

Minority interest 170 170 170 170

Borrowings 0 0 0 0

Trade payables 75,350 87,000 86,532 98,089

Other liabs & prov 14,980 23,213 24,368 24,368

Total liabilities 1,98,695 5,11,741 5,17,580 5,33,655

Net block 49,600 55,180 53,037 43,244

Intangible assets 5,190 2,70,840 2,70,840 2,70,840

Capital WIP 5,970 4,000 4,500 4,500

Total fixed assets 60,760 3,30,020 3,28,377 3,18,584

Non current inv 20 20 20 20

Cash/cash equivalent 63,665 90,544 99,309 1,20,295

Sundry debtors 11,490 17,894 16,619 18,128

Loans & advances 16,580 16,891 16,891 16,891

Other assets 33,860 42,931 42,923 46,296

Total assets 1,98,695 5,11,741 5,17,580 5,33,655

Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E

Reported profit 97,230 1,08,466 1,30,312 1,50,994

Add: Depreciation 10,020 10,344 10,419 10,381

Interest (net of tax) 0 0 0 0

Others 0 11,614 11,739 11,681

Less: Changes in WC 4,110 (1,488) 1,217 6,675

Operating cash flow 76,290 91,258 1,10,429 1,31,300

Less: Capex (8,620) 5,030 7,500 7,000

Free cash flow 84,910 86,228 1,02,929 1,24,300

Key Ratios Year to March FY20A FY21E FY22E FY23E

RoE (%) 84.0 34.5 25.9 29.7

RoCE (%) 116.9 48.0 35.0 40.0

Inventory days 53 54 55 53

Receivable days 14 12 12 12

Payable days 147 142 140 138

Working cap (% sales) 8.3 12.5 12.9 14.5

Gross debt/equity (x) 0 0 0 0

Net debt/equity (x) (0.8) (0.2) (0.3) (0.3)

Interest coverage (x) 75.1 81.8 92.9 107.9

Valuation Drivers Year to March FY20A FY21E FY22E FY23E

EPS growth (%) 11.6 7.2 23.8 15.9

RoE (%) 84.0 34.5 25.9 29.7

EBITDA growth (%) 11.0 15.8 16.6 13.2

Payout ratio (%) 83.8 110.0 80.0 80.0


HINDUSTAN UNILEVER

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The 13 big questions on HUL and our perspectives:

Over the past two months, the HUL stock has underperformed Nifty (by 45%) and

even its smaller peers such as Emami, Dabur and Marico. In this report, we address

the top 13 queries investors have on HUL.

At the same time, we argue HUL offers a very good opportunity now as most of the

concerns are factored in. In our view, higher mobility, consumer-relevant innovation

and investments into market development will drive recovery in HUL’s volume

growth. The company’s business fundamentals remain strong with 86% of its

business gaining penetration. Health, hygiene and nutrition – 80% of the company’s

portfolio – continues to grow in double digits, and the company has seen significant

improvement in discretionary categories. Beauty products have seen a strong

bounce-back as lockdown restrictions are coming off and public gatherings have

resumed.

1. Why is HUL’s volume growth much weaker than Emami, Dabur, Marico, etc?

The bulk of HUL’s portfolio is doing well, but that gets masked in headline

numbers.

Health, Hygiene and Nutrition turned in double digit sales growth of 10% YoY. 86%

of HUL’s business is gaining relative penetration basis Kantar world panel research

survey on last 3-month basis. Subdued fabric wash sales for the past three quarters

due to confined living (even in Q3FY21) caused a 2% YoY dip in home care in Q3FY21

while discretionary segment edged down 1% YoY and Out of Home saw a dip of 15%

YoY. Seven of the existing categories logged double-digit growth in Q3FY21.

Household Care sustained the strong performance across segments delivering a

double-digit uptick. Beauty & Personal Care grew 9% with robust performance

across categories and strong double-digit growths in Skin Cleansing, Hair Care and

Oral Care. Foods & Refreshment sustained the high growth momentum, up 19%.

Launched hygiene products under the Lifebuoy brand – laundry sanitiser, germ kill

spray. Ice Creams, Foods Solutions and Vending businesses are improving

progressively as out-of-home consumption occasions increase.

Portfolio growth trajectory

Source: Company

*Domestic consumer growth and USG excludes the impact of merger of GSK and acquisition of VWash

HINDUSTAN UNILEVER



2. How would the sharp inflation in many raw materials, particularly palm oil,

tea and packaging inputs impact HUL’s gross margins?

Inflationary environment exists for most part of the economy and would

reverberate in most sectors. For most consumer companies too, prices of many

key raw materials are trending up, except perhaps Nestle and Britannia that can

deal with such headwinds more effectively.

Raw materials such as palm oil, tea, copra, edible oils, etc have risen sharply. So

we expect all such companies to pass through these higher costs since the entire

sector faces the issue. We believe, since price hikes have been quite limited over

the past two years, gives HUL room to raise hikes this year.

Tea prices have cooled off from peak levels and HUL has taken a second round

of price hike in soaps in Q4FY21. Besides, sales recovery in higher-margin

businesses such as skin cream, cosmetics, HFDs and higher operating leverage

will cushion the impact. Also we expect HUL to gain market share in soaps and

tea because higher inflation will severely impact smaller/regional companies.

Even so, HUL has other cost levers to cushion the inflationary impact at the

EBITDA margin level.

Raw material tracker

Commodity YoY (%) QoQ (%)

Palm Oil 42.9 13.6

PFAD 36.9 17.9

Copra 23.9 4.9

Wheat (13.0) 6.3

Brent 13.3 28.2

Mentha (16.6) 1.8

Soda Ash (24.2) (1.6)

Vinyl Acetate 66.5 53.0

Gold 19.0 (1.2)

India WPI rectified spirit 0.1 (0.4)

Source: Edelweiss Research, Bloomberg

Margin trajectory

Source: Company

10.0

20.0

30.0

40.0

50.0

60.0

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

(%)

Gross margin (%) EBITDA margin (%)


HINDUSTAN UNILEVER


3. Can HUL’s rural growth derail due to the cut announced in rural subsidies in

the Union Budget?

In our view, there are five reasons that dissipate concerns around its impact on

FMCG rural growth:

Government’s focus on infrastructure would lead to job creation (and thus

set in motion higher urban remittances) and higher GDP growth.

On a two-year basis, budgetary allocations for different rural programs

remain healthy. Besides, higher outlay for infra programs will spur urban

remittances and rural economic growth indirectly, which should drive

volume growth. State governments too play a major role in bankrolling rural

support schemes.

Skymet has forecast a normal monsoon this year. A good monsoon is a key

driver of sentiments for rural consumers. According to the agency, “There is

sufficient cooling in the Pacific Ocean now and La Niña conditions are at the

peak. The Sea Surface Temperatures (SSTs) are likely to rise soon and the

probability of continued La Niña will fall. This will reduce to about 50% when

the Monsoon arrives. This could be one of the ‘normal’ Monsoon years

making a sound start and ending within the upper half of normal range,

range of normal rainfall is 96-104% of LPA (880.6mm). Initial readings are

indicative of some risk attached to few pockets.”

Companies are expanding direct reach in rural areas, apart from adding

more low unit packs at price points of INR1, INR2, INR5 and INR10.

Distribution reach (mn)

Companies Direct Total Direct distribution as

% of overall

HUL 3.2 9.0 35.6

Dabur 1.1 6.4 17.2

ITC 2.5 6.3 39.7

GCPL 1.3 6.0 21.7

Colgate 1.2 5.0 24.0

Britannia 1.7 4.8 35.4

Emami 0.9 4.3 20.9

Marico 0.9 4.6 19.6

Nestle 1.1 4.6 23.9

Bajaj consumer care 0.7 3.8 18.4

Jyothy Labs 0.5 2.2 22.7

P&G 0.7 2.2 31.8

Tata consumer products 0.5 2.5 20.0

Prataap Snacks 0.3 1.7 17.6

Source: Company, Edelweiss Research

Rural per capita consumption of FMCG is about one-third of Urban India.

HINDUSTAN UNILEVER



4. How will laggard categories such as fabric wash, discretionary, OOH products

and detergents perform over coming year?

Fabric wash, skin creams, cosmetics, premium hair oils, male grooming,

cosmetics, styling products, deodorants, and ice creams have faced strong

headwinds for the past few quarters due to confined living, which is now

reversing. We expect CY21 to be a strong year for most of these segments. The

recent festive season marked the return of demand for skincare, creams and

other personal care goods. As offices/travel resume, OOH consumption would

come back.

Sanitisers as a category has cooled off sharply and will get consolidated in favour

of Reckitt and HUL. That said, most other cleaning/hygiene products are doing

well. Fabric wash has huge room to grow. In fact the five-year sales CAGR of

fabric wash has been the same as hair care and tea. Over the same period,

profitability of fabric wash has quadrupled.


HINDUSTAN UNILEVER


5. How will modern trade, Urban recovery help HUL?

HUL gets 55% of its sales from urban, so any recovery thereof would benefit

disproportionately since it is a pan-India focused company. Urban FMCG

demand is beginning to improve, which we envisage would get better. MT,

which had plunged, is now growing (Avenue Supermarts’ sales grew 9% YoY in

Q3FY21). With malls now functional and cinemas permitted to allow 100% of

seating (and big-budget movies likely to hit screens), we expect footfalls to

progressively improve (particularly when new Hindi/regional movies release).

Modern trade recovery bodes well for discretionary segments aided by

activations at stores.

FMCG trend

(%) Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Nominal value growth 15.7 13.4 10 7.5 6.5 3.0 -19.0 1.6 7.3

Value growth (Rural / urban) 1.3 1.2 1.1 0.6 0.7 0.2 NA NA 17.8

Urban growth (%) 14.5 12.7 9.8 8.4 7.4 4.6 -22.2 -7.1 0.8

Rural growth (%) 18.5 15.2 10.3 5.3 5.2 0.9 -13 10.6 14.2

Source: Nielsen

Average salary increments for India Inc are expected to go up to 7.3% from 4.4% in

2020, with 92% of companies planning to hand out increments in 2021.

Increment projections for CY21

Source: Deloitte India

HINDUSTAN UNILEVER



Store level initiatives

Source: Company

Shikhar app - enhancing scale for general trade

Source: Company


HINDUSTAN UNILEVER


6. What is HUL doing in Food? Is it benefiting from a pickup in in-home

consumption?

Post-GSK takeover, HUL’s Foods revenue size is in fact similar to the overall size

of Britannia and Nestle. Thus, HUL is now one of the largest listed food

companies in India.

That aside, we are seeing a renewed focus on Foods by HUL. In the December

quarter, it logged F&R growth of 19% YoY, which is ahead of most other food

companies. HUL sustained strong momentum and in in-home consumption, it

launched Kissan Peanut Butter, a new variant of Bru instant coffee, Bru Veda—

a ‘great tasting’ instant coffee (infused with ayurvedic ingredients such as

ginger, black pepper, tulsi, palm jaggery and coriander seeds), New Knorr

Chicken Cube (a unique product that is made with best-quality chicken and a

special blend of spices that imbue a flavour of slow-cooked chicken instantly

without any added preservatives). Both Horlicks and Boost saw double digit

growth. For Horlicks, HUL is experimenting with LUPs. HUL’s reach has surely

helped to develop the brand and the market as a whole.

It also launched Horlicks Mother's Plus, which has been scientifically designed

keeping in mind nutritional requirements of pregnant and lactating women. The

product contains 25 vital nutrients that are important for optimal nutrition for

mother's health and baby's growth. Another one from Horlicks is the Women's

Plus. Research shows that one in two women over the age of 30 have a risk of

low-bone density, and hence, requires bone-building nutrients. Women's Plus

with its advanced CALSEAL formula has three nutrients: calcium, vitamin D and

K2, which are proven to support bone health.

With the relaunch of the Plus range from the house of Horlicks, HUL made a

strategic intervention into the high sciences space of adult nutrition. Indian diet

may at times be insufficient to meet the RDAs of protein. Horlicks Protein Plus

encourages Indian adults to fight protein deficiency every day by making

“Protein ka Routine”. It is a scientifically formulated high-protein nutritional

beverage for adults that contains a triple protein blend of whey, soy and casein,

which is known to support muscle maintenance and growth.

7. How is HUL doing in e-commerce?

E-commerce channel grew and contributed 2x YoY for HUL. The company has a

portfolio primed for the channel. HUL has among the strongest focus on e-

commerce. It has a strong e-commerce exclusive product portfolio and has

gained share in e-commerce. We believe the company’s portfolio is among the

most suited to e-commerce, not to mention its strong presence as an anchor

tenant among all the key e-commerce channels.

E-commerce contribution

Company Approx. e-commerce channel contribution to sales (%)

Marico 8

Amul 7-8

Dabur 6

HUL 6

GCPL 4.5

Nestle 4

Source: Company

HINDUSTAN UNILEVER



E-commerce gaining momentum

Source: Company

8. HUL doesn’t seem to have delivered on its aspirations in Naturals?

Yes, Ayush has been below initial expectations but it did play an important part

in our view to ward off the threat from Patanjali, when it was at its peak. It has

launched master brands such as Ayush and Nature Protect, and launched brand

extensions across most key brands, not to mention specialist brands given

below.

In fact, with Patanjali now losing its way in most FMCG segments, we do see an

opportunity for HUL. The company is looking at the opportunity in terms of

Naturals products in oral care. HUL has launched ‘Nature Protect’, a range of

multi-category hygiene mix powered by plant-based actives.


HINDUSTAN UNILEVER


Focus on growing Naturals segment

Source: Company

9. How will Sebamed impact HUL—in soaps in general and Dove in particular?

We do not see any significant long-term impact of Sebamed’s recent aggression

on HUL’s soaps in general and Dove in particular. As per our discussion with

other industry players, including GCPL, the recent pH issue will not have any

significant impact on the industry. FMCG needs sustained advertising, not just a

few bursts and takes many years to create a brand pull.

HUL reaffirmed Dove as the number one brand recommended by

dermatologists and that it is milder and suitable for most sensitive skin. It

further said HUL’s brands are best-in-class and deliver fully on the claims, adding

that its products are backed by technology and clinical evidence.

HUL dominates body soaps in India with a market share of ~40%. It straddles

the segment across price points via multiple brands, and has the most extensive

physical retail distribution; this dominance extends to e-commerce sites and

modern trade.

We don’t expect new players to make a dent in FMCG in general, and soaps in

particular given high loyalty in personal care, high entry barriers to distribution

and ad budgets. Besides, pricing of Dove soaps is much lower than that of

Sebamed’s. In India, value proposition is paramount—even in premium-end and

most Indians are likely to find Sebamed overly expensive.

That said, this issue at hand may lead to better awareness of Sebamed among a

section of consumers and retailers. But will a large consumer base shift just

based on few ads and pH proposition? We don’t think so. Comparative ads in

FMCG create a stir many a time, but distribution, pricing and relevant claims are

most important parameters that dictate long-term market share.

HINDUSTAN UNILEVER



Latest ad of Dove – Narrates a story

Source: Company

Innovation quotient remains strong

Source: Company

Latest Ad of Dove | Tells a story rather

just highlighting technical aspects such

as pH


HINDUSTAN UNILEVER


10. How is growth potential in HUL’s segments?

HUL is the category leader in 90% of its portfolio. The FMCG sector has huge

room for growth with many categories having low penetration; HUL plays in all

of this. In higher-penetration categories, there is ample room to ‘premiumise’

and increase per capita consumption. India’s per capita FMCG consumption is

half of Indonesia and one-fourth of China’s.

Low penetration implies ample headroom

Source: Company

India yet to reach at the consumption cusp

Source: Company

HINDUSTAN UNILEVER



Premiumisation story yet to mature

Source: Company; ** FMCG Market where HUL has a presence FMCG Consumption and

Market Price Segmentation –Nielsen Penetration Data –Household Panel data from IMRB

MAT Dec’20 (U+R)

HUL has category leadership in 90% plus of its business

Source: Company

With 9.5% of business coming from India for the parent, HUL easily gets the

highest focus and flexibility among its peers. This is amply visible in a marked

step-up in inorganic growth with four acquisitions over the past four years to

plug white spaces in its portfolio.


HINDUSTAN UNILEVER


M&A catalysing long term growth

Source: Company

Category creator products

Source: Company

11. How is the Innovation funnel now that sanitisers have cooled off?

We expect most of non-core players to soon exit the sanitisers market. This

market will consolidated in favour of core players such as Reckitt and HUL. HUL

is doing multiple innovations (given below). The company has entered new

demand spaces with launch of ‘Vim Matic Dishwash’, ‘Surf Excel Smart Spray’

and ‘Surf Excel Active Hygiene’ to cater to its consumers’ needs. Liquids market

development continues to yield good results. Surf Excel Smart Spray and Active

Hygiene have been launched. The company launched ‘Vaseline Anti-Bacterial

Hand Cream’ and a new range of ‘Dove’ body lotions

HINDUSTAN UNILEVER



Strong innovation quaotient in place

Source: Company

NPDs aimed to drive penetration

Source: Company


HINDUSTAN UNILEVER


12. Can HUL be nimble enough to compete with smaller players/start-ups?

HUL had a head start in terms of its WIMI strategy by 2–3 years against most

other peers. In HUL’s country category business Team, three divisions are split

into 16 mini boards. This frees up HUL’s top management to focus on longer-

term goals, exploring inorganic growth opportunities and managing disruptions.

HUL is partnering with technology-focused start-ups as a business imperative

to reinvent itself and be relevant in a market wherein disruptive technologies

are challenging businesses overnight. HUL has launched a global initiative called

Unilever Foundry, which will help it to imbibe the agility and mentality of start-

ups in its business. It is all about ‘pioneering the future’ with start-ups that are

relevant for its business. Two years ago, HUL partnered a start-up, Ozonetel,

for Kan Khajura Tesan, a mobile-based radio channel to reach media-dark

villages.

It went on to garner 18.5mn subscribers and become one of the fastest-growing

media channels in India. HUL wants more such partnerships and has shortlisted

ten young companies that would share their ideas and, if selected, work with

the consumer goods major.

HUL is becoming more agile and having a bias for action, which are the defining

traits of an entrepreneur, and that Unilever Foundry creates opportunities for

its people to engage with pioneering entrepreneurs and imbibe this spirit. The

biggest challenge for any start-up is how do you take a great idea and convert it

into a business proposition or have a proven technology and scale it up.

That's where Unilever Foundry comes into play. HUL has great minds in

marketing, customer development, technical and supply chain, and versatile

business leaders and what a start-up often needs are a healthy challenge and

assistance to prove their business concept or to scale up a proven idea and make

it viable.

13. What is HUL doing to drive Premiumisation?

HUL’s % of portfolio coming from premium segment is over-indexed to market

at 1.3x, and it has a higher market share in premium end of the market than at

popular- and mass-end of market.

Portfolio mapping across segments

Source: Company

https://brandequity.economictimes.indiatimes.com/tag/startups

https://brandequity.economictimes.indiatimes.com/tag/ozonetel

https://brandequity.economictimes.indiatimes.com/tag/kan+khajura+tesan

HINDUSTAN UNILEVER



Overall volume growth – Entering a very favourable base now

Source: Company, Edelweiss Research

Outlook and valuation: On a firm footing; maintain ‘BUY’

We remain positive on HUL's ability to outgrow the market, as well as its pricing

power underpinned by distribution expansion, deepening direct reach and product

innovation initiatives. Ongoing demand shift from the unorganised segment to

organised should result in additional gains for the company. The merger of GSK

portfolio with HUL has begun to yield revenue delta; we believe the larger story will

be innovation and NPDs in HFD and allied categories.

Cost savings and mix improvement are bound to spur margin structurally. Although,

in the near term, inflationary raw materials may continue to impact gross margin,

going forward, we expect cost-saving initiatives such as zero-based budgeting,

efficiency in ad spends, changes in route-to-market, etc to help. The acquisition of

GSK’s portfolio will also aid overall margin expansion.

We expect premiumisation to sustain and, hence, expect better earnings growth.

Retain ‘BUY/SO’ with a TP of INR2,805. The stock is trading at 52.1x FY22E EPS.

One year forward PE chart

Source: Edelweiss Research, Bloomberg

-10.0

-5.0

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15.0

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(%)

500

1,000

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Ma

r-1

7

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p-1

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r-1

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(IN

R)

65x

55x

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45x50x

35x


HINDUSTAN UNILEVER


Additional Data

Management

MD and Chairman Mr. Sanjiv Mehta

CFO Mr. Srinivas Phatak

Exec Director Mr. Dev Bajpai

Exec Director Mr. Willem Uijen

Auditor BSR & Co. LLP

Holdings – Top 10* % Holding % Holding

Axis Amc 0.23 Jp Morgan Chase 0.45

Vanguard 1.15 ICICI Pru life 0.36

Blackrock 1.13 Standard Life A 0.31

Sbi Funds 0.72 Norges Bank 0.29

Nomura Holdings 0.64 Icici Pru Amc 0.28

*Latest public data

Recent Company Research Date Title Price Reco

27-Jan-21 Decent recovery across portfolio; Result Update

2,399 Buy

11-Jan-21 A bit too caustic; Edel Flash 2,173 Buy

20-Oct-20 Recovery resilient; future looking up; Result Update

2,173 Buy

Recent Sector Research Date Name of Co./Sector Title

24-Feb-21 Nestle India Robust plank to drive double-digit sales; Company Update

19-Feb-21 Bajaj Consumer Care Well-oiled for growth; Company Update

17-Feb-21 Emami Health and rural focus drive growth; Company Update

Rating Interpretation

Source: Bloomberg, Edelweiss research

Daily Volume

Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage

Buy Hold Reduce Total

Rating Distribution* 165 59 17 241

>50bn >10bn and <50bn <10bn Total

Market Cap (INR) 198 49 4 251

* stocks under review

Rating Rationale

Rating Expected absolute returns over 12 months

Buy: >15%

Hold: >15% and <-5%

Reduce: <-5%

TP1,767

TP2,020

TP2,288

TP2,620

1275

1545

1815

2085

2355

2625

Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20

(IN

R)

HUVR IN Equity Buy Hold Reduce0

40

80

120

160

200

Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20

(Mn

)

HINDUSTAN UNILEVER



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HINDUSTAN UNILEVER


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