Sell Hindustan Unilever Dismal performance; Anand Rathi

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Hindustan Unilever
Dismal performance; reiterate Sell
HUL continued with its dismal performance in 3QFY11 too,
reporting PAT decline of 5%. Though volume growth is 13%, it
is on account of increase in ad spend and lower margin. We
retain Sell on the stock as we expect the company to report only
5% earnings CAGR over FY10-13e. Reiterate Sell.

 Revenue growth lower than volume. HUL reported revenue
growth of 12% yoy. Volume was up 13%. The company cut prices
in earlier quarters and saw higher grammage as a freebie, which led
to decline in price-led growth. Soaps & detergents reported
revenue growth of 5.8%. Personal Products and Beverages
registered revenue growth of 20.2% and 9.3% respectively.
 EBITDA margin is down 350bps due to higher raw material
prices and increase in ad spend. All segments reported decline in
EBIT margin. Foods segment saw losses on account of spiralling
food inflation. Net profit dipped 5% yoy.
 Re-entry in low-end toothpastes. HUL re-entered low-end
toothpastes via launch of Pepsodent Supersalt. With P&G getting
aggressive in Oral Care as well as other segments, competitive
pressure has increased, compelling HUL to aggressively spend on
brands. Competition is also curbing HUL’s pricing power. We
expect HUL to lose margin going forward, to support its brands.
 Valuation. We value the stock at target price of `204, based on
target PE of 20x on FY12e earnings. Our target PE is at 25%
premium to 12-month forward Nifty PE