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Hindustan Unilever
No respite
Event
The pricing-led competition has returned to haunt Hindustan Unilever. P&G
India (not listed), has taken price cuts of 15-33% in its hair care brands
Pantene and Heads & Shoulders. Hindustan Unilever is the market leader in
shampoo category with 45% market share and gets ~8% of sales and 12% of
profits from this category. We reiterate our Underperform rating and target
price of Rs235 (implying 17% downside).
Impact
15-33% price cuts in hair care portfolio. As per its new consumer offer, P&G
will be offering Rs10 discount on the shampoo bottles. As a result, the price of
100ml SKU of Pantene will come down from Rs69 to Rs59 and 100ml Heads &
Shoulders will be available at Rs55 from Rs65 earlier. Price cuts in sachets
have been even larger, with prices coming down from Rs1.5 to Re1.0.
Expect HUVR to react with similar price cuts. To protect its market share, we
expect HUVR to cut prices of its shampoo brands Sunsilk and Clear. Also
because of the price cuts in Pantene sachets, we expect HUVR to cut the price
of its largest shampoo brand Clinic Plus too (60% of Clinic Plus sales come
from sachets). Shampoos contribute ~8% to HUVR’s sales and 12% to EBIT.
Timing of price cuts highlights P&G’s market share intent. The latest
price cuts from P&G has come at a time when the FMCG companies are
facing margin pressures due to raw material inflation and companies have
been looking for opportunities to hike prices. Interestingly, the price cuts from
P&G has come on a day when HUVR increased prices for its laundry brands.
HUVR is facing stiff margin pressures in its laundry and personal wash
categories due to rising prices of crude oil derivatives and high palm oil prices.
Dabur gets impacted by this price war too. Over the last year, Dabur’s
(DABUR IN, Rs97, Outperform, TP: Rs118) shampoo sales have been badly
hit due to the price-led competition between HUVR and P&G. We expect
Dabur’s tougher times in shampoos to continue for some time. Shampoo
sales contribute ~4% to Dabur’s consolidate sales.
Earnings and target price revision
No change. We will review earnings post product pricing action HUVR.
Price catalyst
12-month price target: Rs235.00 based on a DCF methodology.
Catalyst: Price action in response to the competition.
Action and recommendation
Lowest growth amongst peers. We expect HUVR’s earnings to grow at an
8% CAGR over the next three years, the lowest among its domestic peers.
We prefer ITC (ITC IN, Rs184, OP, TP: Rs209). ITC has a near monopoly in
its core business and we forecast 20% earnings growth in FY12E. ITC trades
at a 10% PER discount to HUVR.
Competition in personal products segment intensifies
As the competition in shampoo intensifies, we expect personal product margins to decline further
from current ~25%. Personal product margin for HUVR has declined 500bp in last 5 years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever
No respite
Event
The pricing-led competition has returned to haunt Hindustan Unilever. P&G
India (not listed), has taken price cuts of 15-33% in its hair care brands
Pantene and Heads & Shoulders. Hindustan Unilever is the market leader in
shampoo category with 45% market share and gets ~8% of sales and 12% of
profits from this category. We reiterate our Underperform rating and target
price of Rs235 (implying 17% downside).
Impact
15-33% price cuts in hair care portfolio. As per its new consumer offer, P&G
will be offering Rs10 discount on the shampoo bottles. As a result, the price of
100ml SKU of Pantene will come down from Rs69 to Rs59 and 100ml Heads &
Shoulders will be available at Rs55 from Rs65 earlier. Price cuts in sachets
have been even larger, with prices coming down from Rs1.5 to Re1.0.
Expect HUVR to react with similar price cuts. To protect its market share, we
expect HUVR to cut prices of its shampoo brands Sunsilk and Clear. Also
because of the price cuts in Pantene sachets, we expect HUVR to cut the price
of its largest shampoo brand Clinic Plus too (60% of Clinic Plus sales come
from sachets). Shampoos contribute ~8% to HUVR’s sales and 12% to EBIT.
Timing of price cuts highlights P&G’s market share intent. The latest
price cuts from P&G has come at a time when the FMCG companies are
facing margin pressures due to raw material inflation and companies have
been looking for opportunities to hike prices. Interestingly, the price cuts from
P&G has come on a day when HUVR increased prices for its laundry brands.
HUVR is facing stiff margin pressures in its laundry and personal wash
categories due to rising prices of crude oil derivatives and high palm oil prices.
Dabur gets impacted by this price war too. Over the last year, Dabur’s
(DABUR IN, Rs97, Outperform, TP: Rs118) shampoo sales have been badly
hit due to the price-led competition between HUVR and P&G. We expect
Dabur’s tougher times in shampoos to continue for some time. Shampoo
sales contribute ~4% to Dabur’s consolidate sales.
Earnings and target price revision
No change. We will review earnings post product pricing action HUVR.
Price catalyst
12-month price target: Rs235.00 based on a DCF methodology.
Catalyst: Price action in response to the competition.
Action and recommendation
Lowest growth amongst peers. We expect HUVR’s earnings to grow at an
8% CAGR over the next three years, the lowest among its domestic peers.
We prefer ITC (ITC IN, Rs184, OP, TP: Rs209). ITC has a near monopoly in
its core business and we forecast 20% earnings growth in FY12E. ITC trades
at a 10% PER discount to HUVR.
Competition in personal products segment intensifies
As the competition in shampoo intensifies, we expect personal product margins to decline further
from current ~25%. Personal product margin for HUVR has declined 500bp in last 5 years.
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