HUVR reported Q1FY17 Net sales/ EBITDA/ Adj. PAT growth of 3.6%/ 8.2%/ 5.9% with volume growth for the quarter missing estimates at 4% (est of 5-6%). EBITDA margins were ahead of estimates improving by 85 bps YoY to 20.1% as gross margins were up 100 bps YoY with A&P spends declining by 60 bps YoY at 10.8%. While volume growth in the quarter was largely impacted by a further slowdown in rural markets as well as urban, company has maintained its ahead of market growth rate in a slowing market. We believe the same should revive in H2FY17 as rural revives on a better monsoon as well as higher social security spends along with benefit of 7th pay commission for Urban. Overall topline growth for the company should also revive on account of an improvement in volume growth and selective price hikes in addition to mix improvement (as management has indicated the bottoming out of commodity cycle), with expectations of an earnings CAGR of 15% over FY16-18 led by modest margins improvement. Valuations for the stock at 43x/36x FY17/ FY18 earnings however price in the expected recovery in topline/ earnings. We have a NEUTRAL rating with a Mar’ 17 FV of Rs 900.
Q1FY17 results highlights:
· Net sales reported a growth of 3.6% YoY to Rs 79.8 bn with volume growth for the quarter coming in at 4%. The volume growth for the quarter was lower than estimated 5-6% growth impacted by a further slowdown in rural markets as well as urban markets and a marked slowdown in general trade. Home care (Fabric wash, Household care and Water) reported a 6.8% YoY growth in revenues for the quarter led by double digit growth in Surf. Personal Care (Personal wash, Oral care, Skin care, Hair care, Deodorant and Color cosmetics) business reported a 2.1% YoY growth in revenues (growth impacted on account of inclusion of personal wash in the segment which reported a degrowth). Refreshments (tea, coffee and Ice creams) reported a 5.4% YoY growth in revenues for the quarter. Foods reported a 4.7% YoY growth in revenues (with business impacted by a one-off event of the bread issue impacting the Jams off take).
· EBITDA for the quarter reported a growth of 8.2% YoY to Rs 16.3 bn with margins improving by 85 bps YoY to 20.1%. Gross margins for the company improved by 100 bps YoY to 51.3% while A&P spends were lower at 10.8% (down 60 bps YoY) off a high base. In terms of segmental businesses, Home care EBIT grew by 22.7% led by price hikes and premiumisation while Personal Care EBIT was flat YoY (impacted by decline in EBIT in Personal wash segment). Foods saw a 20% YoY decline in EBIT while Refreshments saw a 7.5% YoY growth in EBIT in the quarter.
· Adj. PAT reported a growth of 5.9% YoY to Rs 11.2 bn which with tax rate being flat YoY at 31.6%.
Earnings concall highlights:
· Market growth continued to remain soft. Rural growth and Urban growth have further witnessed a slowdown in the quarter. Industry value growth for the quarter has halved compared to the previous quarter.
· Commodity costs have started to inch up with the company likely to utilize all levers of P&L including price hikes/ mix, etc to target a modest improvement in margins. Volume growth recovery would however remain at the core of the strategy for the company.
· Intrinsic growth stood at 4% impacted by a 40 bps increase in excise.
· Modern trade for the company was ahead of General trade growth (growth in general trade has seen a material slowdown), with ecommerce channel also doing considerably well. General trade mass market has seen the maximum slowdown.
· Some price hikes have taken place in Soaps and detergents which would likely aid value growth going ahead.
· The slowdown in terms of volume growth from earlier 6% (in Q1FY16) to now 4% was impacted both by Personal Care and Home care.
· Personal care business has seen a step up in Personal products offset by deflation in Personal Wash. Lifebuoy, Pears and Dovehave driven volume growth. Skin care growth led by premium variants with FAL doing well. Colour cosmetics and deodorants have done well in the quarter.
· Hair care business has seen a sustained volume growth across brands. Shampoos category has not seen any uptrading from sachets to bottles after the steep price cuts in shampoo bottles. Company has maintained that it continues to grow ahead of market in the hair care segment.
· Oral care remains a key concern for the company largely on account of Pepsodent.
· Detergents as a category for the company has been seeing substantial premiumization led by double digit volume led growth inSurf.
· Refreshment growth has been led by Green tea and Natural variants in Tea, while coffee was impacted by a deflationary competitive environment. Ice creams and Frozen desserts reported a robust quarter. Foods growth was led by Knorr Soups and Boodles as well as Kissan Ketchups.
· Management has planned for a Rs 10 bn capex for a greenfield project in Assam and is targeting to commission the same by Mar’ 17 to avail of excise and income tax benefits.
· Management remains committed to a modest improvement in EBITDA margins largely led by mix improvement as well as operating leverage. However near term outlook in terms of market growth remains muted with concerns on volume growth.
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