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Hindustan Unilever (HUVR)
Consumer products
It’s still gloomy. HUL’s inability to fully neutralize input cost pressures will likely hurt
gross margins in FY2012E. Adspends moderation possible; however, meaningful cut not
probable, in our view, given the high market fragmentation. Disproportionate and
frequent price increases in skincare (to cross-subsidize, in our view) could potentially
lead to market share losses. 3Q results disappointed line by line. The only positive –
contribution of personal care in overall profits is increasing. SELL.
Quote from HUL’s results press release:
“Input cost inflation continued to rise during the quarter. Cost of goods sold went up by
220 bps, as a result of steep rise in material costs, especially in commodity sensitive
categories.”
Now on results
HUL reported net sales of Rs50.2 bn (+12%, KIE Rs51.2 bn), EBITDA of Rs6.2 bn (-13%, KIE Rs7.3
bn) and PAT of Rs5.9 bn (-2%, KIE Rs6.4 bn).
Underlying volume growth of 13% (5% growth in base) during 3Q was in line with our
estimates of 13%. We highlight that substantial part of this volume growth is still consumer
inducements-driven, which poses a threat to brand equity scores, in our view.
EBITDA margins declined 360 bps due to (1) input cost inflation not neutralized by price
increases -- gross margin decline of 220 bps, (2) higher adspends -- 70 bps, (3) higher other
expenditure -- higher freight costs, in our view -- 80 bps.
We are surprised at the margin compression despite
likely higher throughput in own units in fiscal-benefit zones (company has expanded
capacities in Himachal and Uttaranchal prior to March 31, 2010—as evidenced by higher
depreciation which is up 25%)
likely higher production at third party units in fiscal zones (as evidenced by higher ‘purchase
of traded goods’) and likely savings from margin-accretive ingredients in key products.
On a segmental basis, soaps and detergents reported sales growth of 6%, personal products
20% and foods 19% on a low base (1% sequentially). S&D EBIT margin decline of 570 bps to
7.7% was entirely for gross margin compression in soaps, in our view. Personal products EBIT
margin declined 310 bps to 28.8% which was entirely adspends driven, in our view.
Needle movers for FY2012E
Moderation in adspends possible, but not probable, in our view
We believe that HUL is likely to moderate adspends (not meaningfully though) to support
margins in FY2012E. Any cut to adspends (absolute and relative)—for a company which
needs to address structural growth issues—will be significantly negative, in our view. We are
worried about the quality of earnings as cut in adspends could potentially impact the market
shares and market positions
HUL’s (historical) pricing power correlation with inflation is not relevant anymore
Historically, HUL's pricing power had high correlation with inflation—this seems to have
broken down in CY2010. Hence, it will be dangerous to extrapolate the pricing power
argument as the competitive context has changed (1) P&G and L’Oreal are actively focusing
on the Indian market, (2) the erstwhile smaller Indian competition is not small anymore
(Godrej which was one-twentieth of HUL in 2000, is today one-fifth, Dabur is one-fifth from
one-tenth, Nestle is one-fourth from one-eighth).
Street view that HUL has arrested market share losses is just an assumption, in our
view
Some investors believe that HUL has arrested the decline in market shares. We disagree. We
note that it is just an assumption due to lack of data availability. We note that HUL has
stopped providing market shares since April 2010; the period coincides with non-availability
of market shares to analysts from AC Nielsen as well.
We note that most of the consumer companies provide market share data—ITC, Dabur,
Godrej, Colgate, Marico, GSK, Jyothy, Tata Global, Bajaj Corp—all of them provides market
share data in their press release / presentation / investor communication.
Detergents volumes are ‘bought’—current growth rates unlikely to sustain
Rin powder volumes are likely up 100% in YTD CY10 based on massive price discounting.
We note that Rin (HUL) had effected a 30% price cut (Rs50 from Rs70) in February 2010 (a
8% price increase in 2QFY11). Currently, Tide (P&G) sells at a 30% premium to Rin
effectively relegating Rin from the mid-segment to mass-segment. We view the current
volume growth in Rin as entirely price-led, and HUL has gained little structurally by resorting
to deep discounting in Rin (except that it has likely managed to demonstrate to P&G
regarding their intention to defend market shares at any cost).
Soap market shares: It is ITC versus HUL
HUL’s performance in soaps faces ITC challenge starting FY2011E. ITC has achieved a
market share of 6% in soaps—a highly notable achievement in less than 30 months of
category entry. We believe this growth in market share was led by product differentiation
(Fiama Di Wills gel bathing bar), aggressive trade promotions (buy three get one free in
Superia) and focused investment in distribution (~50% of distributors are dedicated
distributors for non-cigarette FMCG).
Success (or otherwise) of the recent launches/extensions
Over the last few years, HUL has seeded quite a few new categories / launched meaningful
brand extensions. Those with high potential are Comfort fabric conditioner, Dove shampoo
and conditioner, Sure anti-perspirant, Vaseline Men’s range, Knorr soupy noodles,
Brookebond Sehatmand (nutritional tea) etc. We note that success (or otherwise) of these
new launches are critical for HUL as maintaining market share in most of the categories is
possible only at a high incremental cost (of adspends).
Retain SELL
We have cut our EPS estimates to Rs9.6 (cut 6%) and Rs11.4 (cut 5%) for FY2011E and
FY2012E, respectively. Retain SELL.
While the acute competitive scenario seems to have abated in detergents, for now, we
highlight that HUL faces an equally formidable competitor in ITC in soaps category (soaps
account for ~30% of HUL’s profits). ITC has achieved a market share of >6% in soaps—a
highly notable achievement in less than 3 years of category entry. We are worried about the
potential threat to HUL’s market position/standing in soaps (and just not market shares per
se). Key risk to our rating is significant reduction in competitive intensity in HUL’s core
categories.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever (HUVR)
Consumer products
It’s still gloomy. HUL’s inability to fully neutralize input cost pressures will likely hurt
gross margins in FY2012E. Adspends moderation possible; however, meaningful cut not
probable, in our view, given the high market fragmentation. Disproportionate and
frequent price increases in skincare (to cross-subsidize, in our view) could potentially
lead to market share losses. 3Q results disappointed line by line. The only positive –
contribution of personal care in overall profits is increasing. SELL.
Quote from HUL’s results press release:
“Input cost inflation continued to rise during the quarter. Cost of goods sold went up by
220 bps, as a result of steep rise in material costs, especially in commodity sensitive
categories.”
Now on results
HUL reported net sales of Rs50.2 bn (+12%, KIE Rs51.2 bn), EBITDA of Rs6.2 bn (-13%, KIE Rs7.3
bn) and PAT of Rs5.9 bn (-2%, KIE Rs6.4 bn).
Underlying volume growth of 13% (5% growth in base) during 3Q was in line with our
estimates of 13%. We highlight that substantial part of this volume growth is still consumer
inducements-driven, which poses a threat to brand equity scores, in our view.
EBITDA margins declined 360 bps due to (1) input cost inflation not neutralized by price
increases -- gross margin decline of 220 bps, (2) higher adspends -- 70 bps, (3) higher other
expenditure -- higher freight costs, in our view -- 80 bps.
We are surprised at the margin compression despite
likely higher throughput in own units in fiscal-benefit zones (company has expanded
capacities in Himachal and Uttaranchal prior to March 31, 2010—as evidenced by higher
depreciation which is up 25%)
likely higher production at third party units in fiscal zones (as evidenced by higher ‘purchase
of traded goods’) and likely savings from margin-accretive ingredients in key products.
On a segmental basis, soaps and detergents reported sales growth of 6%, personal products
20% and foods 19% on a low base (1% sequentially). S&D EBIT margin decline of 570 bps to
7.7% was entirely for gross margin compression in soaps, in our view. Personal products EBIT
margin declined 310 bps to 28.8% which was entirely adspends driven, in our view.
Needle movers for FY2012E
Moderation in adspends possible, but not probable, in our view
We believe that HUL is likely to moderate adspends (not meaningfully though) to support
margins in FY2012E. Any cut to adspends (absolute and relative)—for a company which
needs to address structural growth issues—will be significantly negative, in our view. We are
worried about the quality of earnings as cut in adspends could potentially impact the market
shares and market positions
HUL’s (historical) pricing power correlation with inflation is not relevant anymore
Historically, HUL's pricing power had high correlation with inflation—this seems to have
broken down in CY2010. Hence, it will be dangerous to extrapolate the pricing power
argument as the competitive context has changed (1) P&G and L’Oreal are actively focusing
on the Indian market, (2) the erstwhile smaller Indian competition is not small anymore
(Godrej which was one-twentieth of HUL in 2000, is today one-fifth, Dabur is one-fifth from
one-tenth, Nestle is one-fourth from one-eighth).
Street view that HUL has arrested market share losses is just an assumption, in our
view
Some investors believe that HUL has arrested the decline in market shares. We disagree. We
note that it is just an assumption due to lack of data availability. We note that HUL has
stopped providing market shares since April 2010; the period coincides with non-availability
of market shares to analysts from AC Nielsen as well.
We note that most of the consumer companies provide market share data—ITC, Dabur,
Godrej, Colgate, Marico, GSK, Jyothy, Tata Global, Bajaj Corp—all of them provides market
share data in their press release / presentation / investor communication.
Detergents volumes are ‘bought’—current growth rates unlikely to sustain
Rin powder volumes are likely up 100% in YTD CY10 based on massive price discounting.
We note that Rin (HUL) had effected a 30% price cut (Rs50 from Rs70) in February 2010 (a
8% price increase in 2QFY11). Currently, Tide (P&G) sells at a 30% premium to Rin
effectively relegating Rin from the mid-segment to mass-segment. We view the current
volume growth in Rin as entirely price-led, and HUL has gained little structurally by resorting
to deep discounting in Rin (except that it has likely managed to demonstrate to P&G
regarding their intention to defend market shares at any cost).
Soap market shares: It is ITC versus HUL
HUL’s performance in soaps faces ITC challenge starting FY2011E. ITC has achieved a
market share of 6% in soaps—a highly notable achievement in less than 30 months of
category entry. We believe this growth in market share was led by product differentiation
(Fiama Di Wills gel bathing bar), aggressive trade promotions (buy three get one free in
Superia) and focused investment in distribution (~50% of distributors are dedicated
distributors for non-cigarette FMCG).
Success (or otherwise) of the recent launches/extensions
Over the last few years, HUL has seeded quite a few new categories / launched meaningful
brand extensions. Those with high potential are Comfort fabric conditioner, Dove shampoo
and conditioner, Sure anti-perspirant, Vaseline Men’s range, Knorr soupy noodles,
Brookebond Sehatmand (nutritional tea) etc. We note that success (or otherwise) of these
new launches are critical for HUL as maintaining market share in most of the categories is
possible only at a high incremental cost (of adspends).
Retain SELL
We have cut our EPS estimates to Rs9.6 (cut 6%) and Rs11.4 (cut 5%) for FY2011E and
FY2012E, respectively. Retain SELL.
While the acute competitive scenario seems to have abated in detergents, for now, we
highlight that HUL faces an equally formidable competitor in ITC in soaps category (soaps
account for ~30% of HUL’s profits). ITC has achieved a market share of >6% in soaps—a
highly notable achievement in less than 3 years of category entry. We are worried about the
potential threat to HUL’s market position/standing in soaps (and just not market shares per
se). Key risk to our rating is significant reduction in competitive intensity in HUL’s core
categories.
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