HUL 2QFY11 - Volume at cost of margins; Sell :: Anand Rathi

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Hindustan Unilever
2QFY11 - Volume growth at cost of margins; retain Sell

 Re-iterate Sell. HUL reported revenue and net profit growths of
11% and 3% respectively. Volume growth was 14%, but EBITDA
margin slid 240bp yoy. We retain a Sell as we see the company
reporting earnings growth of merely 4% over FY10-12.
 Volume growth of 14%. HUL reported 11% revenue growth, led
by 14% volume growth. The effect of price cuts in previous
quarters led to the decline in price-led revenue. We reckon the
volume growth was on the low base of Sep ’09 (when volume
growth was 1%). The impact of the average 2% price hike in Sep
’10 would be felt in 3QFY11.
 EBITDA margin lower. EBITDA margin was 240bp lower yoy.
Higher adspend and increased royalties led to the lower EBITDA
margin. The tax rate, at 21.3% yoy, has been steady. Net profit
was up 3% yoy.
 Segment-wise performance. Three major segments: soaps and
detergents, personal products, and beverages reported revenue
growths of 6%, 15% and 9% respectively, although with higher
adspend the EBIT margins in all these segments have slipped, by
190bp, 330bp and 160bp respectively.
 Valuations and risks. We retain a Sell on HUL with a target of
`204. The stock would trade at a target PE of 20x FY12e earnings.
Key risks are better volume growth and less competition.