Buy Hindustan Unilever - high on innovation and aggression; Edelweiss

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Hindustan Unilever (HUVR IN, INR 287, Buy)

n  Opens coffee outlet; direct interface with end consumers to boost brand

Hindustan Unilever (HUL) has opened a Bru World Cafe outlet on a pilot basis in Juhu, an upmarket western suburb of Mumbai. HUL has earlier also used retail outlets to improve distribution and gain direct access to end consumers, like Lakme salons and Swirl ice-cream parlors. HUL has ~130 Swirl parlors, which have driven growth in ice creams while through 125 Lakme salons, it has managed to reach end consumers directly and boast sales growth of personal products. We see a similar potential from Bru Café.

n  Banking on online advertising; Aggression continues

Many FMCG companies, like HUL and Dabur, are focusing on online advertising. Deodorant brand Axe Facebook fan page was launched in May 2010 and already boasts of ~1 mn members. This, in turn, will help the company reach directly to end consumers and mitigate high media rates. Reckitt Benckiser has cut modern retailers margins’ by ~10-15% to partly offset rising input costs, and HUL has launched a special marketing drive in modern retail outlets to gain from the differences between Reckitt Benckiser and Modern Retailers over margins.

n  Rural distribution expands 3x; new products to counter competition

HUL has tripled its rural reach from early 2010 (completed a year earlier than target). This further widens the gap between HUL and smaller players in terms of rural reach. Agriculture GDP grew strongly at 8.9% in Q3FY11 on back of strong kharif crop and base effect, positive for HUL as it derives ~50% sales from rural areas. We believe, it will soon launch new products from parent Unilever’s stable. Alberto-Culver and the personal care and laundry portfolios of Sara Lee, both recent acquisitions, products would be on the radar. With these new products in portfolio, we believe, HUL is rightly placed to target the salon channel, where P&G and GCPL are strong and fabric care market, where Jyothy Laboratories and Reckitt Benckiser have a stronghold.   

n  Outlook and valuations: Positive; maintain ‘BUY’

We are confident of HUL’s underlying business turnaround and prudent cost control. The company will focus on judicious price hikes, increasing market share and product innovation to counter competition. We maintain ‘BUY’ recommendation; on relative return basis, stock is rated ‘Sector Performer’.