Hindustan Unilever - Not out of the woods yet ::Macquarie Research,

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Hindustan Unilever
Not out of the woods yet
Event
 We attended HUVR’s annual investor meet that was held on Tuesday (10
th
May). Management discussed the business outlook and shared key initiatives
taken by them to drive ‘premiumisation’ and ‘innovation’. While we believe
these new initiatives are a step in the right direction, we see limited financial
impact of these in the medium term. We expect earnings to remain underpressure due to high input prices and intense competition is most categories.
 We maintain our Underperform rating. Our revised target price of Rs265
provides 11% potential downside.    

Impact
 Volume growth to slow in FY12E. HUVR achieved volume growth of 13% in
FY11, as they were running large promotions for most of the last year. We
expect slower volume growth next year due to a very high base and as some
of the promotions will be withdrawn due to margin pressures. There already
are signs of a slowdown in the soaps and detergents categories, given the
high inflation. We expect the volume growth to slow to 8% in FY12E. Price
increases and premiumisation will boost overall sales growth to 12%.
 Maintained market shares, but at the cost of margins. Despite the high
competitive intensity in FY11, HUL was able to maintain its market share in
the key categories. However, the competitive pricing eroded its margins
significantly (soaps and detergents margins have fallen ~525bp in 4QFY11).
Also, the impact on the margins due to the ongoing price war (~20% price cut)
in shampoos will start reflecting from the current quarter.
 Innovation and premiumisation – only if it had come earlier. Over the last
18 months, HUVR has increased the thrust behind new product launches. The
company has recently entered several food categories and the premium
personal care categories like skin care and hair care. Similarly, company is
now more focused on driving premiumisation across categories. While we see
these as very positive initiatives, we believe the P&L contribution of these new
products will not be meaningful over the next two years.
Earnings and target price revision
 We have increased our earnings by 3% in FY13E and roll forward our model.
We also increased out TP to Rs265 from Rs235.
Price catalyst
 12-month price target: Rs265.00 based on a DCF methodology.
 Catalyst: Continued raw material inflation
Action and recommendation
 Expensive valuations. HUVR is currently trading at 26.5x its FY12E EPS, an
18% premium to ITC. We think the current valuation doesn’t reflect its
earnings growth potential, as new initiatives are unlikely to bear fruit in next
two years. We continue to prefer ITC over HUVR, given superior profit growth.