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After reporting three quarters of yoy decline in EBITDA, we expect HUVR to report 5% growth for
3QFY11. Our channel checks suggest volume growth was strong in the 3Q, at 10%. Rising
commodity prices pose a margin risk to the FMCG sector, but we believe HUVR would be better
positioned.
3QFY11 earnings to see 13% sales growth and 5% EBITDA growth
HUVR has been reporting declining EBITDA growth on a yoy basis for the past three quarters
due to pricing pressure in the detergents category and increased advertisement spending. The
competitive situation has stabilised, and we expect HUVR to report 13% revenue growth, driven
by strong volume growth of 10% and EBITDA growth of 5%.
Rising inflation in commodity prices poses margin risk to FMCG sector
Rising prices of key raw materials such as palm oil and crude-based derivatives clearly pose a
margin risk to the FMCG sector. This, coupled with rising food inflation that reduces the
purchasing power on the margin, could have an impact on volume growth for the FMCG sector.
HUVR typically has three to six months of forward cover for its key raw materials, which we
believe would prevent a knee-jerk impact on margins. Due to its global sourcing strategy and
better prediction capability over its competitors, we believe HUVR's relative competition position
would be better in this challenging environment on the cost side.
Stock trades close to our fair value; we maintain Hold
HUVR trades at 26.3x FY12F earnings, based on our forecasts. Our earnings are already 5%
higher than consensus, and we see little room for upgrades. If HUVR displays stabilising
advertisement expenses to sales (at around 14%), and improving market share, we could see
scope for re-rating in the stock.
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