Hindustan Unilever
Long-term drivers intact
Our recent interaction with HUVR's management gave us no reason to raise our
earnings forecasts, but we came away confident that HUVR was better positioned
to drive growth in a fast changing consumer market. Its rural initiative will likely
differentiate it from the competition. We maintain our Buy call.
Management cautious about competitive pressures easing
The official management view remains that competition is intense and that advertisement
spending will remain high in the medium term. HUVR has raised soap and detergent prices,
but this has only partially neutralised cost pressures.
Moving out of low-margin segments like soaps and tea, despite losing market share
Management clarified that it had consciously moved away from mass-market offerings in
soaps and tea, even at the cost of losing market share, as it did not find commercial business
value in sustaining offerings in the low-margin and highly competitive segments in these
categories. However, it highlighted the success of the Wheel detergent brand in the mass
market, which is delivering superior returns even at lower EBIT margins.
We remain positive on the stock; maintain Buy
The HUVR stock has risen 30.8% over the last six months (vs 14% rise in the BSE Sensex),
and at 24.4x FY12F earnings its valuation no longer looks cheap. However, we believe
HUVR is positioning itself to take advantage of growth acceleration in rural India through the
expansion of its rural distribution network. HUVR is also up-trading in urban India with strong
and sustained innovation in the premium segments across product categories. We believe
there could be a positive earnings surprise after FY11.
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