Reduce Hindustan Unilever says Nomura

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􀁾 Action
Although 2Q FY11F volume growth momentum was a positive surprise, continued
margin pressure and tough comps over the next couple of quarters remain a
concern. Following the stock’s strong run since Augugust (HUVR +18.9% vs.
Sensex +11.5%), valuation is now at the top end of the long range at 27.3x FY12F.
We reiterate our REDUCE on an unchanged PT of Rs222; as far as the shares go,
this would seem to be as good as it gets for holders, but we are not holders.
􀁡Catalysts
We believe the company’s focus on regaining lost market share will keep A&P
spending high and pricing power low, which could hurt margins in FY11F.
Anchor themes
HUVR has a dominant position across various categories in the FMCG space, but
is now facing intense pressure from global and local players, which, we believe, will
hold back earnings growth in FY11F.






Unable to strike a balance
􀁣 2Q FY11 results in line with our expectations
2Q FY11 witnessed intense margin pressure, as per our expectations.
While volume growth has indeed picked up, we believe it is unlikely to
hold.
􀁤 Margin pressure to intensify
2Q FY11 was the third consecutive quarter of EBITDA and PAT
decline. The company has really felt the heat of rising competition and
increase in commodity prices. Despite the recent price hikes, we
believe the situation will continue to worsen. This remains a primary
cause for concern.
􀁥 Volume growth unlikely to sustain
Given the high base of 2H FY10 and recent fill reductions, we believe
that volume growth is unlikely to sustain. The performance of its body
wash and personal products segment remains a cause of concern.
􀁦 Valuations expensive, maintain REDUCE
Hindustan Unilever has been one of the best performing stocks over
the past three months, outperforming the Sensex and the FMCG
index by 7.4% and 7.7%, respectively. As a result of this strong run up,
the stock is now trading at 27.3x FY12F, which is towards the top end
of its long-term average. The stock is now one of the most expensive
under our coverage and offers the lowest earnings CAGR over FY10-
FY12F. We continue to remain negative on the stock given that
profitability increasingly keeps coming under pressure. We believe
Asian paints is a much better play on the long-term consumption story
and would advise investors to switch. Maintain a REDUCE.