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HUL posted weak set of numbers on the earnings front for 3QFY2011. While
revenues came in line with our estimate, growing 11.6% yoy to `5,027cr
(`4,504cr), recurring earnings declined 5.2% yoy on the back of margin pressures
arising from raw material cost inflation. Other key highlights of the results
include: 1) revenue growth of 5.8% yoy in the soaps and detergents (S&D)
segment, 20% yoy in personal product (PP) segment and 9.3% yoy in beverages
segment, 2) exports grew 200% to `23cr (`8cr), with EBIT margin expansion of
496bp yoy, and 3) decline in OPM by 353bp yoy to 12.4% on account of gross
margin contraction of 202bp yoy. We upgrade the stock from Reduce to Neutral.
Double-digit volume growth maintained, profitability yet to recover: HUL posted
top-line growth of 11.6% yoy to `5,027cr (`4,504cr) largely driven by
acceleration in volume growth to 13%. Overall FMCG sales grew 11.5% yoy,
aided by 11.6% yoy growth in home and personal care (HPC) and 11.3% yoy
growth in foods business. At the operating level, OPM contracted by 353bp yoy as
gross margins contracted by 202bp yoy on account of raw material price inflation
and increase in overheads (ad-spend and other expense increased). In terms of
earnings, HUL posted a 5.2% yoy decline to `573cr (`604cr) on a recurring basis,
owing to margin contraction, increase in depreciation expense by 25% yoy to
`56cr (`45cr) and 52bp yoy increase in the tax rate.
Outlook and Valuation: At the CMP of `271, the stock is trading at 21x FY2012E
earnings. We upgrade the stock from Reduce to Neutral, with a Fair Value of
`282 based on 23x FY2012E revised EPS of `12.3.
Recurring earnings declines ~5% yoy despite 65% jump in other
income
In terms of earnings, HUL posted a 5.2% yoy decline to `573cr (`604cr) on a
recurring basis, despite the ~65% yoy jump in other income, impacted by
margin contraction, increase in depreciation expense by 25% yoy to `56cr
(`45cr) and 52bp yoy increase in tax rate. However, on a reported basis, HUL
posted a decline of ~2% yoy in earnings to `638cr (`649cr) aided by the `20cr
exceptional gain this quarter (on account of profit on sale of property and
long-term investments)
OPM dips 353bp due to higher overheads and input cost inflation
At the operating level, HUL posted yet another quarter of weak performance, as
gross margins contracted by 202bp yoy on account of raw material price
inflation, increase in ad-spend (up 73bp yoy) and other expenses (up 89bp yoy).
Higher new launches and re-launches (launched Ponds Gold radiance,
re-launched Dove, Red Label and Lifebuoy) resulted in advertising expenses
increasing sequentially by 97bp. Hence, OPM for the quarter contracted by
353bp yoy to 12.4% (16%) resulting in 13% yoy decline in EBITDA to `624cr
(`718cr).
In terms of categories, the S&D segment witnessed margin contraction of 572bp
yoy impacted by the escalation in input costs, personal products registered a
margin contraction of 313bp yoy and processed foods margins contracted by
657bp yoy. However, beverages and ice creams registered margin expansion of
200bp and 897bp yoy, respectively.
S&D segment on recovery mode, margins have bottomed out
The S&D segment continued its recovery mode registering a growth of 5.8% yoy
post corrective price actions in detergents and brand re-launches in soaps (we
highlight HUL’s S&D segment recorded negative growth in 3QFY2010 and
4QFY2010). The acceleration in top-line growth this quarter was led by the
double-digit volume growth in detergents (all three brands grew well) despite price
hikes and competitive intensity in the detergent category, while the re-launched
soaps portfolio registered growth across segments. However, profitability took a
hit as margins dipped by 572bp yoy due to the unrelenting palm oil prices,
promotional offers and higher ad-spend.
While we have modeled in 7% CAGR in S&D revenues and 234bp margin
contraction over FY2010-12, we believe there exists upside risks to our estimates.
Going ahead, we expect the S&D category to post higher volume growth aided by
low base and corrective actions. Moreover, recent price hikes in select SKUs of
soaps and detergents are likely to aid margin recovery in 4QFY2011. A key risk to
our call of recovery in the segment emanates from lack of pricing power recovery,
growing market share of ITC and rising palm oil prices.
Personal product sales continue to post double-digit volume growth
The PP segment posted 20.2% yoy growth, the seventh consecutive quarter of
double-digit growth largely aided by volumes. Innovations in the skin care segment
with product launches in the premium range (Ponds Gold Radiance) and good
performance of the hair care products led to this double-digit growth. However,
the segment margins disappointed contracting by 313bp yoy to ~29%.
Nonetheless, we believe the S&D segment margins have bottomed out (581bp
expansion qoq this quarter).
We believe the worst time of declining margins is over for HUL’s PP category. We
have modeled in 16.5% CAGR in PP revenues and a marginal 18bp margin
contraction over FY2010-12, on account of increase in advertisement spends.
Processed foods, ice creams do well, beverages disappoint
The foods segment recorded a growth of ~11% yoy driven largely by strong
growth in processed foods (up ~19% yoy) and ice creams (up ~31% yoy).
However, beverages disappointed registering muted growth of ~9% yoy as the tea
market continues to witness slowdown; coffee growth was however, robust.
Processed foods grew in strong double-digits as Kissan and Knorr recorded
impressive volume-led growth. Knorr Soupy Noodles has met with good consumer
response.
Investment Rationale
Brand positioning shift from mass market segment to premium market
segment: HUL has been very actively re-launching some of its existing brands
and increased the pace of new launches, targeting the mid/premium market
segment (launched Ponds Gold Radiance and re-launched Dove and Rin in the
PP and S&D categories, respectively). This in our view is positive, considering
that the company will have better control on pricing. Constant innovations
have also helped HUL stabilise its market share losses. However, we remain
slightly cautious due to ITC’s commitment to categories like soaps, shampoos
and skin care, which may pose a major threat to HUL in the long run. We
have modeled in 7.3% and 16.5% CAGR in S&D and PP segment revenues
over FY2010–12 and margins at 10–12% and ~25% for the two segments,
respectively.
Robust domestic play and strong balance sheet provides further impetus: HUL
with its iconic brands has sustained its volume growth, which is impressive
given the recent price hike (future price hike is not ruled out) and strong
competitive scenario, indicating a revival in consumer demand and higher
growth in the mid/premium end market segments. Moreover, HUL is a cash
rich and zero-debt company enjoying high RoEs of ~79%. We have modeled
recurring earnings CAGR of ~13% over FY2010–12 and expect margins to
contract by 245bp yoy in FY2011 (impacted by raw material inflation) before
recovering in FY2012 (expect margin expansion of 175bp yoy).
Outlook and Valuation
Sustained double-digit volume growth for four consecutive quarters (albeit on a
low base) and steady performance of PP and foods businesses were the key
positive takeaways from the 3QFY2011 results. Hence, we have marginally revised
our top-line estimates upwards by 0–2%. We have pruned our margins for FY2011E by
140bp to reflect the higher-than-anticipated increase in raw material prices
recorded by the company during the quarter. Our earnings estimate for FY2011
also stands revised downwards by ~8%. For FY2012, we have revised our
earnings upwards by 2.4% as concerns over inflationary environment wane.
We expect HUL to post 12% CAGR in top-line over FY2010-12 largely aided by the
recent price hikes in the S&D segment, steady performance by the personal care
and foods divisions (aided by innovations and higher ad spend), spike in
detergents volume and modest performance by its soaps business (aided by brand
re-launches). We expect HUL to post 12.9% CAGR in terms of recurring earnings
during the period impacted by the dip in margins (high base, due to price cuts and
rising inflationary scenario) and higher tax rate (on account of increase in MAT).
At the CMP of `271, the stock is trading at 21x FY2012E earnings. We upgrade
the stock from Reduce to Neutral, with a Fair Value of `282 based on 23x
FY2012E revised EPS of `12.3.
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HUL – 3QFY2011 Result Update
Angel Broking upgrades HUL to Neutral from Reduce.
HUL posted weak set of numbers on the earnings front for 3QFY2011. While
revenues came in line with our estimate, growing 11.6% yoy to `5,027cr
(`4,504cr), recurring earnings declined 5.2% yoy on the back of margin pressures
arising from raw material cost inflation. Other key highlights of the results
include: 1) revenue growth of 5.8% yoy in the soaps and detergents (S&D)
segment, 20% yoy in personal product (PP) segment and 9.3% yoy in beverages
segment, 2) exports grew 200% to `23cr (`8cr), with EBIT margin expansion of
496bp yoy, and 3) decline in OPM by 353bp yoy to 12.4% on account of gross
margin contraction of 202bp yoy. We upgrade the stock from Reduce to Neutral.
Double-digit volume growth maintained, profitability yet to recover: HUL posted
top-line growth of 11.6% yoy to `5,027cr (`4,504cr) largely driven by
acceleration in volume growth to 13%. Overall FMCG sales grew 11.5% yoy,
aided by 11.6% yoy growth in home and personal care (HPC) and 11.3% yoy
growth in foods business. At the operating level, OPM contracted by 353bp yoy as
gross margins contracted by 202bp yoy on account of raw material price inflation
and increase in overheads (ad-spend and other expense increased). In terms of
earnings, HUL posted a 5.2% yoy decline to `573cr (`604cr) on a recurring basis,
owing to margin contraction, increase in depreciation expense by 25% yoy to
`56cr (`45cr) and 52bp yoy increase in the tax rate.
Outlook and Valuation: At the CMP of `271, the stock is trading at 21x FY2012E
earnings. We upgrade the stock from Reduce to Neutral, with a Fair Value of
`282 based on 23x FY2012E revised EPS of `12.3.
In-line revenue aided by double-digit volume growth
For 3QFY2011, HUL posted top-line growth of 11.6% yoy to `5,027cr (`4,504cr)
largely driven by consistent double-digit volume growth of 13% (recall the
company posted 14% volume growth in 2QFY2011, which came at the back of
price hike). Overall FMCG sales grew 11.5% yoy aided by 11.6% yoy growth in
HPC and 11.3% yoy growth in foods business. In HPC, the S&D segment posted a
growth of 5.8% yoy despite price hikes and intense competition in the detergents
category. In detergents, Rin delivered impressive growth, while Lifebuoy recorded
strong growth post the re-launch. The PP segment registered 20.2% yoy growth,
the seventh consecutive quarter of double-digit volume-led growth. In the foods
business, all segments performed well and contributed to growth (beverages grew
9.3% yoy, processed foods 18.6% yoy and ice creams 30.9% yoy).
Recurring earnings declines ~5% yoy despite 65% jump in other
income
In terms of earnings, HUL posted a 5.2% yoy decline to `573cr (`604cr) on a
recurring basis, despite the ~65% yoy jump in other income, impacted by
margin contraction, increase in depreciation expense by 25% yoy to `56cr
(`45cr) and 52bp yoy increase in tax rate. However, on a reported basis, HUL
posted a decline of ~2% yoy in earnings to `638cr (`649cr) aided by the `20cr
exceptional gain this quarter (on account of profit on sale of property and
long-term investments)
OPM dips 353bp due to higher overheads and input cost inflation
At the operating level, HUL posted yet another quarter of weak performance, as
gross margins contracted by 202bp yoy on account of raw material price
inflation, increase in ad-spend (up 73bp yoy) and other expenses (up 89bp yoy).
Higher new launches and re-launches (launched Ponds Gold radiance,
re-launched Dove, Red Label and Lifebuoy) resulted in advertising expenses
increasing sequentially by 97bp. Hence, OPM for the quarter contracted by
353bp yoy to 12.4% (16%) resulting in 13% yoy decline in EBITDA to `624cr
(`718cr).
In terms of categories, the S&D segment witnessed margin contraction of 572bp
yoy impacted by the escalation in input costs, personal products registered a
margin contraction of 313bp yoy and processed foods margins contracted by
657bp yoy. However, beverages and ice creams registered margin expansion of
200bp and 897bp yoy, respectively.
S&D segment on recovery mode, margins have bottomed out
The S&D segment continued its recovery mode registering a growth of 5.8% yoy
post corrective price actions in detergents and brand re-launches in soaps (we
highlight HUL’s S&D segment recorded negative growth in 3QFY2010 and
4QFY2010). The acceleration in top-line growth this quarter was led by the
double-digit volume growth in detergents (all three brands grew well) despite price
hikes and competitive intensity in the detergent category, while the re-launched
soaps portfolio registered growth across segments. However, profitability took a
hit as margins dipped by 572bp yoy due to the unrelenting palm oil prices,
promotional offers and higher ad-spend.
While we have modeled in 7% CAGR in S&D revenues and 234bp margin
contraction over FY2010-12, we believe there exists upside risks to our estimates.
Going ahead, we expect the S&D category to post higher volume growth aided by
low base and corrective actions. Moreover, recent price hikes in select SKUs of
soaps and detergents are likely to aid margin recovery in 4QFY2011. A key risk to
our call of recovery in the segment emanates from lack of pricing power recovery,
growing market share of ITC and rising palm oil prices.
Personal product sales continue to post double-digit volume growth
The PP segment posted 20.2% yoy growth, the seventh consecutive quarter of
double-digit growth largely aided by volumes. Innovations in the skin care segment
with product launches in the premium range (Ponds Gold Radiance) and good
performance of the hair care products led to this double-digit growth. However,
the segment margins disappointed contracting by 313bp yoy to ~29%.
Nonetheless, we believe the S&D segment margins have bottomed out (581bp
expansion qoq this quarter).
We believe the worst time of declining margins is over for HUL’s PP category. We
have modeled in 16.5% CAGR in PP revenues and a marginal 18bp margin
contraction over FY2010-12, on account of increase in advertisement spends.
Processed foods, ice creams do well, beverages disappoint
The foods segment recorded a growth of ~11% yoy driven largely by strong
growth in processed foods (up ~19% yoy) and ice creams (up ~31% yoy).
However, beverages disappointed registering muted growth of ~9% yoy as the tea
market continues to witness slowdown; coffee growth was however, robust.
Processed foods grew in strong double-digits as Kissan and Knorr recorded
impressive volume-led growth. Knorr Soupy Noodles has met with good consumer
response.
Investment Rationale
Brand positioning shift from mass market segment to premium market
segment: HUL has been very actively re-launching some of its existing brands
and increased the pace of new launches, targeting the mid/premium market
segment (launched Ponds Gold Radiance and re-launched Dove and Rin in the
PP and S&D categories, respectively). This in our view is positive, considering
that the company will have better control on pricing. Constant innovations
have also helped HUL stabilise its market share losses. However, we remain
slightly cautious due to ITC’s commitment to categories like soaps, shampoos
and skin care, which may pose a major threat to HUL in the long run. We
have modeled in 7.3% and 16.5% CAGR in S&D and PP segment revenues
over FY2010–12 and margins at 10–12% and ~25% for the two segments,
respectively.
Robust domestic play and strong balance sheet provides further impetus: HUL
with its iconic brands has sustained its volume growth, which is impressive
given the recent price hike (future price hike is not ruled out) and strong
competitive scenario, indicating a revival in consumer demand and higher
growth in the mid/premium end market segments. Moreover, HUL is a cash
rich and zero-debt company enjoying high RoEs of ~79%. We have modeled
recurring earnings CAGR of ~13% over FY2010–12 and expect margins to
contract by 245bp yoy in FY2011 (impacted by raw material inflation) before
recovering in FY2012 (expect margin expansion of 175bp yoy).
Outlook and Valuation
Sustained double-digit volume growth for four consecutive quarters (albeit on a
low base) and steady performance of PP and foods businesses were the key
positive takeaways from the 3QFY2011 results. Hence, we have marginally revised
our top-line estimates upwards by 0–2%. We have pruned our margins for FY2011E by
140bp to reflect the higher-than-anticipated increase in raw material prices
recorded by the company during the quarter. Our earnings estimate for FY2011
also stands revised downwards by ~8%. For FY2012, we have revised our
earnings upwards by 2.4% as concerns over inflationary environment wane.
We expect HUL to post 12% CAGR in top-line over FY2010-12 largely aided by the
recent price hikes in the S&D segment, steady performance by the personal care
and foods divisions (aided by innovations and higher ad spend), spike in
detergents volume and modest performance by its soaps business (aided by brand
re-launches). We expect HUL to post 12.9% CAGR in terms of recurring earnings
during the period impacted by the dip in margins (high base, due to price cuts and
rising inflationary scenario) and higher tax rate (on account of increase in MAT).
At the CMP of `271, the stock is trading at 21x FY2012E earnings. We upgrade
the stock from Reduce to Neutral, with a Fair Value of `282 based on 23x
FY2012E revised EPS of `12.3.
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