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Hindustan Unilever (HLL.BO, Rs273, UW, PT Rs223)
Why are we UW?
• Earnings growth volatility in the next two to three quarters
is likely to put downside pressure on the stock.
• Potential increase in competitive pressures from P&G
likely to result in further stock de-rating.
• It would have to step up investments to gain market share
as competitive intensity is quite strong.
• Input cost pressures still remain at elevated levels.
Reiterate UW: We believe that EBITDA margins for HUL
have peaked for now. Rising input costs amidst intense
competition and slowing revenue growth are likely to constrain
earnings. We see a disconnect between industry
fundamentals, with intense competition that threatens to
disturb market share equilibrium across categories, and
company valuations are at 26.3x F12e earnings vs. group
average of 22.4x F12e.
What’s in the Price: HUL stock price performance and
re-rating following the laundry price war with P&G in 2003-04
were contingent on a recovery in the operating margins – i.e.
visible signs of decline in competitive intensity. In the current
cycle, the stock has been re-rated even as operating margins
continue to slide. Markets seem to be factoring in a scenario
of fragmented and sporadic competitive activity. Contrary to
this, we believe that ongoing competitive activity is likely to be
sustained – it’s driven by players with long-term commitments
and strong balance sheets. Even if our concerns on cost and
competitive pressures eventually prove exaggerated, current
valuations leave little room for outperformance, in our view.
Investment Positives
Strong market position with leading brands
Significant distribution advantage over peers
Strong business model with good capital efficiency
Investment Concerns
Market share loss
Continuing competition in potentially high-growth
categories
Input cost volatility
F3Q11 – Severe Cost and Competitive pressures
Continue: HUL's Q3 performance clearly demonstrates the
twin impact of continuing high intensity of competitive activity
and rising input pressures in the HPC space in India.
Operating profit margins declined by 490bps, driven by
570bps decline in soaps and detergent margins and 310bps
decline in personal product margins.
HUL’s revenues, EBITDA and adjusted PAT have grown by
9%, (-)18% and (-)15% respectively and this compares with
our expectations of 12.5%, 3.1% and 7.6% respectively and
consensus expectation for net profit growth of (-)0.5%. EBIT
margins in the soaps and detergent segment at 7.7% for the
quarter is the lowest ever and compares to 11.4% margins
during the peak of competitive pressures in F2005. We
believe that competitive intensity and rising input costs will
continue to constrict earnings progression.
Key Highlights of the Results:
1) Domestic FMCG revenue growth of 11.8% driven a
combination of 11.6% growth in HPC and 11.3% growth
in foods business. Net revenues for HUL grew by 11.7%
driven by volume growth of 13% in domestic consumer
business.
2) Overall gross margins are declined by 320bps YoY,
however, operating profit margin declined by 490bps
driven primarily by 110bps increase in advertisement and
promotion expenses and 110bps increase in other
expenditure.
3) Foods business has reported a revenue growth of 11.3%
largely driven by beverage and Ice-Cream growth of 31%
and processed food growth of 19% (versus our
expectation of 25%).
4) PP segment revenues grew by 20% YoY (higher than our
expectation of 18%). Margins at 28.8% were around
120bps lower than our expectation.
5) Other Income is up 98% YoY. Interesting excluding this,
the profit for HUL is down 26.4% YoY.
6) Total business capital employed has increased from
Rs(-)5.2bn in Q2F11 to Rs(-)3.0bn, in the quarter under
review.
Management commented: “Our strategy is working and is
reflected in the consistent double digit underlying volume
growth over the last four quarters and ahead of market growth.
We continue to strengthen our leadership in core categories,
even as we invest to build opportunities for the future. In an
inflationary environment, we will manage our business
dynamically, through judicious pricing actions and increased
focus on cost effectiveness, while ensuring that we remain
competitive in the market place.”
Investment Thesis
• We are Underweight on HUL. Rising
competitive pressure threatens to
change the current market share
equilibrium across product categories.
• HUL stock price performance and
re-rating after the laundry price war with
P&G in 2003-04 was contingent on a
recovery in the operating margins for
the business, i.e. visible signs of decline
in competitive intensity.
• Parallels with the stock performance in
2003-04 markets seem to be factoring a
scenario of fragmented and sporadic
competitive activity, in our view.
• Contrary to this perception, we believe
that ongoing competitive activity is likely
to be sustained – it’s driven by players
with long-term commitments and strong
balance sheets
• Rising input costs add to margin
pressures
Key Value Drivers
• Personal products: Acceleration/
deceleration in revenue growth
• Market share: Further gain/loss in
market share across all categories
• New businesses: Success of failure in
entering new businesses such as
packaged foods, water etc.
• Margin expansion or contraction:
Driven by competitive and cost
pressures & mix impact
Potential Catalysts
• Step up in competitive activity,
increased promotion and/or higher
marketing expenditures.
• Input cost volatility.
• Inability to improve market share.
Key Upside Risks
• Benign input environment; sharp
recovery in volume growth; gains in
market share; reduced competitive
activity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever (HLL.BO, Rs273, UW, PT Rs223)
Why are we UW?
• Earnings growth volatility in the next two to three quarters
is likely to put downside pressure on the stock.
• Potential increase in competitive pressures from P&G
likely to result in further stock de-rating.
• It would have to step up investments to gain market share
as competitive intensity is quite strong.
• Input cost pressures still remain at elevated levels.
Reiterate UW: We believe that EBITDA margins for HUL
have peaked for now. Rising input costs amidst intense
competition and slowing revenue growth are likely to constrain
earnings. We see a disconnect between industry
fundamentals, with intense competition that threatens to
disturb market share equilibrium across categories, and
company valuations are at 26.3x F12e earnings vs. group
average of 22.4x F12e.
What’s in the Price: HUL stock price performance and
re-rating following the laundry price war with P&G in 2003-04
were contingent on a recovery in the operating margins – i.e.
visible signs of decline in competitive intensity. In the current
cycle, the stock has been re-rated even as operating margins
continue to slide. Markets seem to be factoring in a scenario
of fragmented and sporadic competitive activity. Contrary to
this, we believe that ongoing competitive activity is likely to be
sustained – it’s driven by players with long-term commitments
and strong balance sheets. Even if our concerns on cost and
competitive pressures eventually prove exaggerated, current
valuations leave little room for outperformance, in our view.
Investment Positives
Strong market position with leading brands
Significant distribution advantage over peers
Strong business model with good capital efficiency
Investment Concerns
Market share loss
Continuing competition in potentially high-growth
categories
Input cost volatility
F3Q11 – Severe Cost and Competitive pressures
Continue: HUL's Q3 performance clearly demonstrates the
twin impact of continuing high intensity of competitive activity
and rising input pressures in the HPC space in India.
Operating profit margins declined by 490bps, driven by
570bps decline in soaps and detergent margins and 310bps
decline in personal product margins.
HUL’s revenues, EBITDA and adjusted PAT have grown by
9%, (-)18% and (-)15% respectively and this compares with
our expectations of 12.5%, 3.1% and 7.6% respectively and
consensus expectation for net profit growth of (-)0.5%. EBIT
margins in the soaps and detergent segment at 7.7% for the
quarter is the lowest ever and compares to 11.4% margins
during the peak of competitive pressures in F2005. We
believe that competitive intensity and rising input costs will
continue to constrict earnings progression.
Key Highlights of the Results:
1) Domestic FMCG revenue growth of 11.8% driven a
combination of 11.6% growth in HPC and 11.3% growth
in foods business. Net revenues for HUL grew by 11.7%
driven by volume growth of 13% in domestic consumer
business.
2) Overall gross margins are declined by 320bps YoY,
however, operating profit margin declined by 490bps
driven primarily by 110bps increase in advertisement and
promotion expenses and 110bps increase in other
expenditure.
3) Foods business has reported a revenue growth of 11.3%
largely driven by beverage and Ice-Cream growth of 31%
and processed food growth of 19% (versus our
expectation of 25%).
4) PP segment revenues grew by 20% YoY (higher than our
expectation of 18%). Margins at 28.8% were around
120bps lower than our expectation.
5) Other Income is up 98% YoY. Interesting excluding this,
the profit for HUL is down 26.4% YoY.
6) Total business capital employed has increased from
Rs(-)5.2bn in Q2F11 to Rs(-)3.0bn, in the quarter under
review.
Management commented: “Our strategy is working and is
reflected in the consistent double digit underlying volume
growth over the last four quarters and ahead of market growth.
We continue to strengthen our leadership in core categories,
even as we invest to build opportunities for the future. In an
inflationary environment, we will manage our business
dynamically, through judicious pricing actions and increased
focus on cost effectiveness, while ensuring that we remain
competitive in the market place.”
Investment Thesis
• We are Underweight on HUL. Rising
competitive pressure threatens to
change the current market share
equilibrium across product categories.
• HUL stock price performance and
re-rating after the laundry price war with
P&G in 2003-04 was contingent on a
recovery in the operating margins for
the business, i.e. visible signs of decline
in competitive intensity.
• Parallels with the stock performance in
2003-04 markets seem to be factoring a
scenario of fragmented and sporadic
competitive activity, in our view.
• Contrary to this perception, we believe
that ongoing competitive activity is likely
to be sustained – it’s driven by players
with long-term commitments and strong
balance sheets
• Rising input costs add to margin
pressures
Key Value Drivers
• Personal products: Acceleration/
deceleration in revenue growth
• Market share: Further gain/loss in
market share across all categories
• New businesses: Success of failure in
entering new businesses such as
packaged foods, water etc.
• Margin expansion or contraction:
Driven by competitive and cost
pressures & mix impact
Potential Catalysts
• Step up in competitive activity,
increased promotion and/or higher
marketing expenditures.
• Input cost volatility.
• Inability to improve market share.
Key Upside Risks
• Benign input environment; sharp
recovery in volume growth; gains in
market share; reduced competitive
activity.
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