Visit http://indiaer.blogspot.com/ for complete details HUL posted modest set of numbers for the quarter though broadly in line with our
expectations. While top-line growth was marginally above estimates, driven by
acceleration in volume growth to 14%, recurring earnings declined 7% yoy. Other
key highlights of the results include – 1) 6.3% yoy revenue growth in S&D
segment, EBIT margin contracted 186bp yoy to 11.7%, and 2) personal products
grew 14.7% yoy, EBIT margin contracted 332bp yoy/180bp qoq. We maintain
Reduce on the stock.
Volume growth accelerates to 14%, profitability yet to recover: HUL posted
top-line growth of 10.7% yoy to `4,681cr (`4,228cr) largely driven by
acceleration in volume growth to 14% (impressive given recent price hikes and
14% qoq dip in ad-spend though aided by low base of 1% volume growth in
2QFY2010). Overall FMCG sales grew 9.7% with an 8.9% growth in HPC and
13.2% growth in foods business. In terms of earnings, HUL posted 7% yoy decline
to `526cr (`563cr) on a recurring basis, despite the 82% yoy spike in other
income to `161cr (`88cr), owing to margin contraction and 790bp yoy increase
in the tax rate. At the operating level, HUL posted yet another quarter of weak
performance, despite only a marginal 20bp rise in input costs largely due to
significant rise in overheads (up 225bp) even as ad-spend increased only 13%
yoy (14% qoq decline).
Outlook and Valuation: At the CMP of `306, the stock is trading at 25.5x
FY2012E earnings. We maintain Reduce on the stock, with a Target Price of `276
(based on 23x FY2012E EPS) largely owing to weak earnings growth
vis-à-vis the FMCG sector and relatively higher competitive intensity.
Investment Concerns
High competitive intensity across categories, ITC a major threat: During the last
several quarters, management has constantly admitted that competitive intensity
across the key categories of soaps, detergents, shampoos and skin care has
increased and is likely to intensify further. While corrective steps taken by HUL
over the last several quarters in terms of correcting pricing, promotional activity
and strengthening distribution have helped stabilise market share losses, we
believe ITC’s commitment to categories like soaps, shampoos and skin care is a
major threat for HUL in the long run.
OPM to decline as re-investment in ad-spend to sustain: Over FY2010-12, we
have modeled in 70bp reduction in OPM (100bp in FY2011) despite
incremental gains from cost rationalisation measures and moderate decline in
gross margins, as we expect ad-spend to rise to ~14-14.5% levels from the
current 13.6% (though initial signs of moderation in ad-spend was reflected in
the current quarter) due to high competitive intensity. Hence, we expect EBITDA
to increase at a muted 8% CAGR over FY2010-12.
Rich valuations for a muted 11% CAGR unjustified: At the CMP of `253, HUL is
trading at rich valuations of 22.5x FY2012E earnings, which is unjustified given
the muted 11% CAGR expected over FY2010-12 (~2.5x PEG) vis-à-vis sector
growth (ex-HUL) of ~15-18%. In terms of historical valuations, HUL is trading at
50% premium to the Sensex (in line with 5-yr average) and ~5% discount of 5-yr
average P/E leaving little room for upside.
Outlook and Valuation
Sustained double-digit volume growth for three consecutive quarters (albeit on a low
base), qoq decline in advertising spends and steady performance of personal
products and foods business were the key positive takeaways from the 2QFY2011
results. Hence, we have marginally tweaked our estimates upwards. While the recent
round of price hikes in the S&D segment and peaking ad-spends does indicate some
signs of competitive easing, we await emergence of significant value growth (-3% in
2QFY2011 due to price cuts), which would play an important role post 3QFY2011
when the low base in terms of volume growth bottoms out.
We expect HUL to post 11% CAGR in top-line over FY2010-12 largely aided by the
recent price hikes in the S&D segment, steady performance of its personal care and
foods division (aided by innovations and higher ad-spend), spike in detergents
volume growth and modest performance of its soaps business (aided by brand
re-launches). In terms of earnings, we expect HUL to post a weak 11.5% CAGR
during the period impacted by the dip in margins (high base due to price cuts) and
higher tax rate (on account of increase in MAT).
At the CMP of `306, the stock is trading at 25.5x FY2012E earnings. We maintain
Reduce on the stock with a Target Price of `276 (based on 23x FY2012E EPS) largely
owing to weak earnings growth vis-à-vis the FMCG sector and relatively higher
competitive intensity.
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