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HINDUSTAN UNILEVER
Lagged pain
We maintain our Underperform call on Hindustan Unilever and lower our
earnings estimates by 5-9% for FY12-13. Management has given a clear
message in the 3QFY11 result announcement that protecting growth and
market share takes precedence over margins. The strategy is in the longterm interests of shareholders.
However, the interim margin impact would
be adverse and given the usual delay of two quarters between input price
hikes and a reflection of the same in the P&L, the worst is yet to come.
Ebitda dropped 13% YoY in 3QFY11. Hindustan Unilever’s (HUVR IB -
RS281.6 - U-PF) 3QFY11 Ebitda dropped 13% YoY, driven by a 300bp
margin contraction which was largely attributable to an increase in rawmaterial costs (+216bps YoY) and sustained high advertisement and
promotional (A&P) expenditure. The impact at the recurring profit after tax
level was restricted to only -2% YoY, however, thanks to the near doubling
of financial other income.
Raw-material prices have hurt. Palm-oil prices have risen by 38% over the
past six months and 57% over the past three months. The full impact of rawmaterial prices usually comes through after two quarters due to the inventory
and forward cover effect. Consequently, while the company has taken a 2-3%
weighted average price hike in the soap portfolio in January 2011, more is
required just to maintain margins at the current (7-8%) level. Additionally,
crude-based chemicals (LAB and PET) have been firming up and the firm may
feel a greater raw-material price impact in a quarter or two.
Sustained double-digit volume growth a positive. The 13% volume
growth (the fourth quarter in a row now) clearly demonstrates that the
company’s strategy of pursuing growth is working, though an acid test of
the same would be the March 2011 quarter where the comparison will be
with a higher base for the first time. The most profitable (28% Ebit
margin) personal-products business growing by 20% is another positive
from the results.
Stock should underperform. We expect margin pressure to sustain for
the next three to four quarters and soap and detergent margins to reach
double digits only by 4QFY12. Consequently, we lower our FY12-13
estimates by 9% and 7%. Our 12-month target remains unchanged as the
earnings downgrade negates the benefit of rolling forward to March 2013.
The potential lowering of palm/crude-oil prices will be a potential positive
trigger for the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDUSTAN UNILEVER
Lagged pain
We maintain our Underperform call on Hindustan Unilever and lower our
earnings estimates by 5-9% for FY12-13. Management has given a clear
message in the 3QFY11 result announcement that protecting growth and
market share takes precedence over margins. The strategy is in the longterm interests of shareholders.
However, the interim margin impact would
be adverse and given the usual delay of two quarters between input price
hikes and a reflection of the same in the P&L, the worst is yet to come.
Ebitda dropped 13% YoY in 3QFY11. Hindustan Unilever’s (HUVR IB -
RS281.6 - U-PF) 3QFY11 Ebitda dropped 13% YoY, driven by a 300bp
margin contraction which was largely attributable to an increase in rawmaterial costs (+216bps YoY) and sustained high advertisement and
promotional (A&P) expenditure. The impact at the recurring profit after tax
level was restricted to only -2% YoY, however, thanks to the near doubling
of financial other income.
Raw-material prices have hurt. Palm-oil prices have risen by 38% over the
past six months and 57% over the past three months. The full impact of rawmaterial prices usually comes through after two quarters due to the inventory
and forward cover effect. Consequently, while the company has taken a 2-3%
weighted average price hike in the soap portfolio in January 2011, more is
required just to maintain margins at the current (7-8%) level. Additionally,
crude-based chemicals (LAB and PET) have been firming up and the firm may
feel a greater raw-material price impact in a quarter or two.
Sustained double-digit volume growth a positive. The 13% volume
growth (the fourth quarter in a row now) clearly demonstrates that the
company’s strategy of pursuing growth is working, though an acid test of
the same would be the March 2011 quarter where the comparison will be
with a higher base for the first time. The most profitable (28% Ebit
margin) personal-products business growing by 20% is another positive
from the results.
Stock should underperform. We expect margin pressure to sustain for
the next three to four quarters and soap and detergent margins to reach
double digits only by 4QFY12. Consequently, we lower our FY12-13
estimates by 9% and 7%. Our 12-month target remains unchanged as the
earnings downgrade negates the benefit of rolling forward to March 2013.
The potential lowering of palm/crude-oil prices will be a potential positive
trigger for the stock.
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