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Hindustan Unilever (HUVR)
Consumer products
While the Street theorizes on P&G, we highlight the L’Oreal risk. We are worried
about the potential impact of L’Oreal’s expansion plans on HUL; maintaining current
market share in personal products in the incremental market growth will be a huge
challenge for HUL, in our view. In <10 years of active operations, L’Oreal has achieved
no.1 position in hair color (urban) and no.2 in overall skincare market. It is no.1 in the
professional products channel (salons etc.) as well as pharmacy channels. While we see
potential for promotions-induced volume growth of ~12% for HUL in 3QFY11E,
we recommend staying away from a potential cyclical upturn—in volumes without
profits—in a structurally weak story.
HUL needs to worry about L’Oreal more than P&G, in our view
We are worried about the potential impact of L’Oreal’s aggressive expansion plans on HUL.
Companies like L’Oreal represent the new breed of MNCs with renewed focus on India and
willingness to customize products to suit the local preferences as well as stay invested. While HUL,
because of legacy reasons of being present in India for a long time, had a head-start in local
consumer understanding, competition is clearly closing the gaps.
Contrary to popular perception, we highlight that L’Oreal India is not just an urban top-end player
anymore (Exhibit 1 and 6). The company has effectively entered mass market skincare with sachets;
channel checks suggest good consumer response due to the strong brand salience of Garnier. In a
recent investor meeting, L’Oreal outlined its target to achieve one billion new consumers (from
emerging markets). The company presented new development pillars for L’Oreal Research and is
planning to create the “Consumer Insights” International division as well as regional Research &
Innovation hub in Asia.
Personal products account for ~30% and 50% (skincare accounts for 11% and 26%) of HUL’s
sales and profits. Considering the emergence of formidable players like L’Oreal, maintaining the
current market share in the incremental market growth will be a huge challenge for players like
HUL, in our view.
Few notable facts about L’Oreal in India
` In ~10 years of active operations in India, L’Oreal has achieved sales of ~Rs7 bn (~15% of HUL’s
personal products portfolio)
` Market share of ~8% in cosmetics and a strong no.2 position
` No.1 position in hair color (urban) and no.2 in overall skincare market
` No.1 in the professional products channel (salons etc.) as well as pharmacy channels.
Note that the likely throughput of skincare products (particularly mid to premium) is high
in these channels compared with the typical grocery channel
` The company has improved coverage by 100,000 outlets to 350,000 outlets in CY2009
and has a target of 1mn outlets (which accounts for ~60% of skincare sales)
HUL—it is still a case of either (sales), or (profits)
We are not enthused by consumer inducements-driven volume growth which poses a threat
to brand equity scores, in our view (necessitating sustained higher ad support). We highlight
that HUL’s adspends’ linkage to gross margins is fairly high—and not linked to market
demands alone, as perceived by the Street.
Retain SELL due to prevalence of heightened competition in mature and
emerging categories
We maintain our EPS estimates of Rs10.2 and Rs12 for FY2011E and FY2012E, respectively.
We reiterate our SELL rating and target price of Rs250 as ~65% of the revenues are from
categories which are mature and growing at best at 3% in volumes (where the company
also faces heightened competition).
While the acute competitive scenario seems to have abated in detergents, for now, we
highlight that HUL faces an equally formidable competitor in ITC in soaps category (soaps
account for ~30% of HUL’s profits). ITC has achieved a market share of >5% in soaps—a
highly notable achievement in less than 3 years of category entry. We are worried about the
potential threat to HUL’s market position/standing in soaps (and just not market shares per
se). Key risk to our rating is significant reduction in competitive intensity in HUL’s core
categories.
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