Broker's call: HUL (Accumulate)

CMP: ₹1,728

Target: ₹1,816

Hindustan Unilever net sales was up 6.6 per cent y-o-y at ₹10,110 crore, 1.2 per cent lower than our estimates. The domestic business posted volume growth of 5 per cent y-o-y versus our estimates of 6 per cent y-o-y and value growth of 7 per cent y-o-y. Home care at 10 per cent y-o-y and food & refreshments at 9 per cent y-o-y lifted growth while personal care lagged, up 4 per cent y-o-y. Gross margin was flat y-o-y at 54 per cent. Ebitda was up 17.6 per cent y-o-y at ₹2,650 crore, 1.6 per cent higher than our estimate adjusted for IND AS 116. Ebitda margin expanded 244 bps y-o-y. Adjusted for IND AS 116, Ebitda margin improved 150 bps, led by cost rationalisation: staff cost was down 19 bps y-o-y, ad spend down 67 bps y-o-y and other cost down 154 bps y-o-y as a percentage of sales. Adjusted PAT was up 11.6 per cent y-o-y at ₹1,750 crore, in line with our estimates.

Valuation: We lower our EPS by 4 per cent for FY20E and 2 per cent by FY20E, led by 1) the cut in volume growth from 9.5 per cent to 6.0 per cent and a price cut to 1 per cent from 3 per cent to 1 per cent offset by gross margin expansion of 120 bps, led by benign raw material prices & Ebitda margin rising to 25.1 per cent, up 252 bps y-o-y, led by IND AS 116 impact (SG&A: down 111bp) and cost rationalization in ad spend, down 78 bps. We upgrade to ‘Accumulate’ from ‘Reduce’, due to a stock price correction of -3.4 per cent over three months.

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