Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever (HLL.BO, UW, PT Rs223)
Why are we UW?
• Markets seem to be factoring in rising margins for F12 –
we find this assessment aggressive in the current
environment of rising costs and limited pricing power.
• Potential increase in competitive pressures 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.
• Sustained inflationary pressures may impact revenue
growth adversely.
Reiterate UW: We believe that EBITDA margins for HUL
have peaked for now. Rising input costs amid 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 26x F12e earnings similar to the
staples group average. At our target price of Rs223 (21%
downside), the stock would trade at 21x F12 earnings.
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 sustain
– players with long-term commitments and strong balance
sheets drive it. 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
F4Q11 Expectations – Operating margins likely to
disappoint market expectations: We expect HUL to report
revenue growth of 13.4% driven by 13% domestic FMCG
growth. We forecast 11% growth in soaps & detergents and
15% growth in personal products. We expect overall margins
to contract by 164bps in 4Q, primarily from increasing input
costs not fully covered by price hikes. Palm oil prices are up
55% YoY in Q4F11. We believe a lower tax rate should drive
an adjusted net profit growth of 9% yoy.
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 or 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.
Where we could be wrong
• 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, UW, PT Rs223)
Why are we UW?
• Markets seem to be factoring in rising margins for F12 –
we find this assessment aggressive in the current
environment of rising costs and limited pricing power.
• Potential increase in competitive pressures 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.
• Sustained inflationary pressures may impact revenue
growth adversely.
Reiterate UW: We believe that EBITDA margins for HUL
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 26x F12e earnings similar to the
staples group average. At our target price of Rs223 (21%
downside), the stock would trade at 21x F12 earnings.
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 sustain
– players with long-term commitments and strong balance
sheets drive it. 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
F4Q11 Expectations – Operating margins likely to
disappoint market expectations: We expect HUL to report
revenue growth of 13.4% driven by 13% domestic FMCG
growth. We forecast 11% growth in soaps & detergents and
15% growth in personal products. We expect overall margins
to contract by 164bps in 4Q, primarily from increasing input
costs not fully covered by price hikes. Palm oil prices are up
55% YoY in Q4F11. We believe a lower tax rate should drive
an adjusted net profit growth of 9% yoy.
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 or 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.
Where we could be wrong
• Benign input environment; sharp
recovery in volume growth; gains in
market share; reduced competitive
activity.
No comments:
Post a Comment