The following is the recently-issued Stock Analyst Note on Hindustan Unilever, published by Morningstar Analyst Suruchi Jain. Registered Morningstar Members gain exclusive access to our full HUL Analyst Report, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Registered member? Get these reports immediately when you sign up with Morningstar for free.
Hindustan Unilever ended the year on solid footing, confirming our thesis that driving margin improvement by upselling consumers to premium products will yield measurable improvements.
HUL's full-year performance impressed us, with underlying sales growing at 16% year over year, reflecting balanced volume (up 7%) and price growth (up 9%), along with a modest, 80 basis-point expansion in operating margin, to 14.9%.
Despite strong competitive pressures from other companies looking to gain a slice of the Indian consumer's growing spending power, HUL’s strong results confirm that it remains on solid ground, with decades of local experience. We believe it will continue to earn returns in multiples of its cost of capital for at least the next decade, further validating our narrow economic moat rating.
While fiscal 2013 results were broadly in line with our full-year estimates, we're placing our fair value estimate for its shares under review, and will likely increase it by about 10% to account for the increased stake by Unilever to 75% in its Indian subsidiary, and the renewed focus that this investment will bring to HUL's portfolio expansion.
Quarterly sales popped 13% (driven by volume growth of 6% relative to last year's fourth quarter) led by beverages (up 18%), soaps and detergents (up 13%), and packaged food (up 7%). We think HUL's advertising spend behind new product launches over the last few quarters is resulting in broad-based growth across product categories, signaling that consumers are accepting its new introductions.
HUL's focus on driving down costs yielded a quarterly gross margin expansion of 106 basis points, to 46.9%. However, quarterly operating margin rose just 60 basis points, to 14.3%. This muted margin expansion reflects the firm’s increased advertising investments (12.7% of sales), which in our opinion is a wise allocation of resources, given the competitive market environment.
We forecast that the firm will continue spending over 12% on advertising, and drive further margin expansion despite the higher ad spend. The company maintained 60% dividend payouts (returning INR 10.5 per diluted share and an INR 8 per share special dividend). We expect to update our analysis and rating within the week, incorporating a more optimistic outlook.