Hindustan Unilever Equity Research

Date of Research – 12-01-2016

Price- Rs. 812.95

About the Company

Incorporated in the year 1933, Hindustan Unilever Limited (“Hindustan Unilever” or “Company”) is a Fast Moving Consumer Goods (FMCG) company. HUL has a diversified presence in the FMCG sector with more than 35 brands spanning 20 distinct categories including soaps and detergents, shampoos, skin care, toothpastes, and packaged foods. British-Dutch company Unilever PLC and its Affiliates are the promoters of HUL and own 52.5 % shares in the Company (On 30 April 2013, Unilever PLC announced plans to increase its stake in the Company to 75 % by way of an open offer). Over the years, HUL has grown substantially by acquiring landmark brands and has managed to maintain its dominant market position in various categories. HUL’s portfolio includes leading household brands including Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, and Lakme.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations27,003.9929,233.2831,972.1933,193.72 35,759.00 
Expenses22,798.6724,491.6026,558.4627,244.13 29,419.00
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)4,205.324,741.685,413.735,949.59 6,340.00
Depreciation251.32295.54322.39357.28 432.00
Finance Costs25.7240.6817.704.54 35.00
Other income532.03570.98566.65397.32 369.00
Exceptional items(605.72)(238.74)(679.22)38.53 (237.00) 
PBT5,066.035,215.186,319.515,946.56 6,479.00  
Tax1,226.661,259.441,944.001,852.48 1,977.00  
Extraordinary items– 12.00  
PAT (before Minority Interest and share of Associates)3,839.373,955.744,375.514,094.08 4,490.00  
Profit/ (loss) attributable to Minority Interest10.3910.1712.4311.66 – 
Consolidated Profit / (Loss) for the year3,828.983,945.574,363.04,082.42 4,490.00  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio15.5716.2216.9317.92 17.73 
Net Profit Margin Ratio14.2213.5313.6912.33 12.56 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital216.15216.25216.27216.35216.39 
Reserves & Surplus3,464.932,648.523,321.023,805.293,755.32 
Net worth (shareholders funds)3,681.082,864.773,537.294,021.643,971.71 
Minority Interest18.3020.8622.2824.8025.05 
Long term borrowings8.448.447.0042.00 
Current liabilities6,701.98,005.529,068.639,205.199,747.39 
Other long term liabilities and provisions1,005.971,192.251,132.671,171.801,378.70 
Total Liabilities11,407.2512,091.8413,769.3114,430.8015,164.85 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets2,490.502,653.853,037.663,256.133,646.71 
Noncurrent Investments70.25395.32380.19323.90325.00 
Current assets8,255.778,115.669,559.519,982.1010,242.27 
Long term advances and other noncurrent assets380.82718.49531.22587.70636.37 
Deferred Tax Assets209.91208.52179.55199.79233.32 
Goodwill on consolidation (net)81.1881.1881.18 
Total assets11,407.2512,091.8413,769.3114,430.8015,164.85 

Efficiency Analysis

 (%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE94.17145.31132.89133.56148.86 
ROE / RONW75.8191.05111.54108.49103.08 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)27,003.9929,233.2831,972.1933,193.72 35,759.00 
Growth (%)15.22 %8.26 %9.37 %3.82 % 7.73 % 
PAT (Rs. Cr.)3,839.373,955.744,375.514,094.08 4,490.00  
Growth (%)37.11 %3.03 %10.61 %(6.43 %) 9.98 % 
Earnings Per Share – Basic (Rs. )17.7118.2420.1718.87 20.62 
Earning Per Share – Diluted (Rs. )17.7018.2320.1618.86 20.62 
Price to Earnings26.3331.8542.4446.10 51.12 

Dividend History

The Company has maintained an average dividend yield of 2.12 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Hindustan Unilever’s average current ratio over the last 5 financial years has been 1.11 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Hindustan Unilever’s average long term debt equity ratio over the 5 financial years has been 0.00 times which indicates that the Company operates with close to zero debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Hindustan Unilever’s average interest coverage ratio over the last 5 financial years has been 1,094.36 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2016, Hindustan Unilever reported a promoter holding of 67.21 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 18.72 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.