Maintain neutral on Hindustan Unilever with revised target of Rs 840

Hindustan Unilever’s Q4FY16 performance was below expectations on net sales up 3.5% y-o-y to Rs 79.5 billion (est. Rs 80.5 billion)—led by underlying volume growth of 4% (est. 6%). EBITDA grew 17.7% y-o-y to Rs 14.7 billion (est. Rs 13.4 billion) and Adj. PAT grew 13.2% y-o-y to Rs 10.3 billion (est. Rs 9.4 billion).

Volume performance muted — 4% in 4QFY16. Adjusting for one offs like channel correction volume growth was 5%, still lower than expectations. Intrinsic growth in Personal Products was 7% (reported growth 2%). Gross margin expanded 340bp y-o-y to 52.6% (est. 50.7%). Increased staff costs (up 60 bp y-o-y) ad spends (up 30bp y-o-y) and higher other expenses (up 30bp y-o-y) partially offset the gross margin gains resulting in EBITDA margin expansion of 220bp y-o-y to 18.5% (est. 16.6%).

Soaps and detergents (S&D) posted 2.1% revenue growth while Personal Products (PP) division posted 2.8% growth. S&D margins expanded 120bp y-o-y to 14.5%, while PP margins expanded by 490bp y-o-y to 29.5%. Consumption demand environment is challenging with incremental slowdown in Rural India. Rural demand pressures and continued deflationary environment are the key near-term risks for HUVR, in our view. Valuations at 40.2x and 35.3x FY17E/FY18E EPS remain fair, in our view. Maintain neutral with revised target price of Rs 840 (value at 35x FY18 EPS).

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