Hindustan Unilever -2QFY11 EBITDA Disappoints; SELL says Citi

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Hindustan Unilever (HLL.BO)
2QFY11 EBITDA Disappoints; Other Income Drives PAT Growth
 Recurring PAT at ~Rs5.33bn — Profit growth of 7% Y/Y beat estimates by ~4%,
variance attributed to higher other income, as operating EBITDA at Rs6.47bn was
~2% below estimates. While volume growth was 14% (positive surprise vs.
expectations of ~10-11%), EBITDA margins at 13.6% (down 40 bps Q/Q) were a
tad (40 bps) below estimates. The gross margin profile at 49% was constant Q/Q -
but higher SGA (linked to higher volume growth + some one-off expenses in
packaging moulds) resulted in SGA rising to ~18% of revenues (+240bps Q/Q).
 Volumes growth recovers — ~14% Y/Y volume growth has been aided by a low
base (2QFY10: +1% Y/Y). Mgmt noted it has grown ahead of the market in HPC
and foods, implying market share gains. HPC growth was 9%, with market share
gains in both soaps and detergents, whilst PP growth was 15%. Competitive
intensity seems to have abated sequentially - ad spends linked to brand building
continue to escalate (up 90 bps Y/Y), but lower promotional spends (down 60 bps
Y/Y, imply some deceleration in competition). Overall, ad+ promotional spends
could remain in the range of ~14% of revenues (up from ~10%, 2 years ago,
reflective of a structurally more competitive environment).
 Personal products margins disappoint — PP revenues rose ~15% Y/Y, but margins
shrank ~330bps Y/Y to 23%, resulting in flat EBIT growth. That said, PP EBIT for
1H has risen ~12%Y/Y – an area of concern given this is HUVR's structural growth
driver. Soap / detergents EBIT declined ~8% Y/Y, but should improve as the base
becomes more benign over the next 1-2Qs.
 Maintain Sell; Target price of Rs278 — We revise our TP as we roll forward to
Mar12 from Dec11 and raise our target multiple to 24x from 22x, as directionally,
earnings are bottoming out — EBIT margins in the soaps & detergents are almost
at the lowest level in 4 years. The stock has traded at ~24x (avg.) over the last 5
years – bounce-back in the multiple reflects a reversion to mean. While downside
is limited, but see few catalysts at this juncture to get constructive. Reiterate Sell.