Hindustan Unilever Sales growth at the cost of margins :: Macquarie Research,

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Hindustan Unilever
Sales growth at the cost of margins
Event
 HUVR reported weak 2QFY11 results. While company achieved strong sales
volume growth on a low base, competitive pressures hit margins to record low
levels. Recurring PAT declined 7%YoY to Rs5.2bn, broadly in line with our
and street expectations. We reiterate Underperform and target price of Rs210.
Impact
 14% volume growth on a low base. Sales grew by 10%YoY to Rs47bn on
back of 14% volume growth. This volume growth is on a low base of 1%
volume growth in 2QFY10 and achieved by inducements like price cuts and
volume promotions. Sales of the two largest segments, soaps and detergents
(S&D) and personal products, grew 6% and 15%, respectively.
 EBITDA margins decline 307bp to 13%. EBITDA for 2QFY11 declined 11%
to Rs6.3bn and margin contracted 307bp to 13%. Price cuts due to intense
competitive action in detergents, shampoos etc, 30bp hike in advertisement
and promotional (A&P) expenses and 235bp hike in other expenses were
primarily responsible for this large drop in margins.
 Category margins disappoint. Soaps & detergents’ EBIT declined 8%YoY
as margins contracted 186bp to 11.7%. In laundry, Rin, delivered double-digit
volume growth post its relaunch. Lifebuoy was also relaunched during last
quarter. Personal products’ EBIT margins contracted by 332bp to 23%.
Beverages sales grew 9% but margins declined 165bp. High cost inflation led
to downtrading in the tea market.
 Next few quarters will be challenging. We believe that HUVR will find it
difficult to maintain strong volume growth momentum in the coming quarters,
as it will no longer have the benefit of a low base. In addition, high A&P
expense due to intense competition and rising commodity prices will keep
margins under pressure.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs210.00 based on a DCF methodology.
 Catalyst: Pricing action in personal product categories
Action and recommendation
 Fundamentals remain weak due to the strong competitive pressures in key
product categories. HUVR finds itself in a Catch-22 situation: it can avoid
losing market share to aggressive competitors, but only at the cost of margin
erosion from increased promotion expenses.
 Lowest growth among peers: We expect margin pressures to keep HUVR’s
three-year earnings growth muted at 9% CAGR, the lowest among its
domestic peers. Maintain Underperform. We continue to prefer ITC (ITC IN,
Outperform, Rs169, TP: Rs187).