Hindustan Unilever, or HUL, reported an earnings decline of 22% for third-quarter fiscal 2016, owing to the large exceptional property sale in the year-ago quarter. After adjustment for exceptional items, earnings grew by 23%.
We maintain our full-year earnings estimate of INR 44 billion, as the company has already earned INR 30 billion in the first nine months. Lower commodity and oil costs kept profits buoyant with gross profits (up 290 basis points) and EBIT margins (up 60 basis points), which is modestly ahead of our estimates, despite low-single-digit value growth.
Revenue was up just 3% (volumes up 6%), as price competition remains intense in soaps and detergents (47% of annual sales), forcing HUL to take price cuts and pass on lower commodity costs. Growth in key segments before excise duty adjustments (which affected value realized per product) was 2% for soaps, 7% for personal products, 7% for beverages and 12% for packaged foods.
The company is working hard to persuade the price-sensitive Indian consumer to stick with its brands during a highly competitive and deflationary cycle. Our narrow moat rating on the stock remains intact, as HUL's products continue to be priced at a premium to those of its competitors; however, the company is instituting discounts to ensure that this pricing premium doesn't widen. From a valuation perspective, shares remain pricey, trading 30% above our fair value estimate.
A board resolution to transfer about INR 22 billion back to shareholders from the company’s general reserves should further boost the share price, depending on the method of distribution. The company is well capitalized, with INR 34 billion in cash reserve as of September, and generates about 12% of sales as free cash each year. Its recently announced acquisition of Indulekha, an Indian herbal brand, for INR 3.3 billion (USD 50 million) is a good use of this dry powder. Both announcements are positive for this Standard steward of shareholder capital.
