Hindustan Unilever Volumes rise, one-offs affect margins :: UBS

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UBS Investment Research
Hindustan Unilever
Volumes rise, one-offs affect margins
􀂄 Revenue growth +10.7%, EBITDA decline -8%
Q2 FY11 domestic volume growth was +14% and revenue grew 10.7% to
Rs46.8bn (UBS-e Rs 46.5bn), while EBITDA declined 8% to Rs6bn (UBS-e Rs
6.9bn). The key reason has been an increase in other expenses to 18% of sales (vs.
15.6% in Q2 FY10) due to the one-time cost of purchase of new moulds. Reported
PAT was impacted by a one-off exceptional gain of Rs404m from the sale of
properties and investments.
􀂄 Soaps and detergents (S&D)—on the path of margin recovery
S&D revenues grew 6.3% YoY and EBIT margins recovered sequentially from
11% to 11.7%, due to strong volumes and price increases implemented in August.
Product re-launch of Rin (delivered double-digit sales growth) and Lifebuoy helped
gain volumes in the category.
􀂄 Personal products (PP)—innovation-related costs impact margins in Q2
PP revenues grew 14.7% driven by strong volumes (with ~12-13% volume
growth). There is a sequential decline in PP margins to 23% from 24.8% in Q1
FY11 due to the allocation of a majority of one-time mould costs to the PP
category. Beverages grew 9.3% in revenue (mainly led by growth in coffee) and
declined ~1% in EBIT terms, as the category was affected by higher tea prices.
􀂄 Valuation: maintain price target of Rs325
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’ VCAM tool. We assume a WACC of 11%,
and interim and terminal year growth rates of 10% and 5%, respectively.