Hindustan Unilever: Fine print :CLSA

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Fine print
HUL’s FY11 annual report highlights that the company’s strategy of
pursuing volume growth at the cost of margins is paying off with all time
high volume growth in the detergents segment. The internal endorsement
of the success of the strategy is evident in a 65% YoY rise in variable
compensation of the directors. We now lower our FY12 and FY13 A&P
spend estimates by 50bps and 80bps respectively, driving an 3-6%
earnings upgrade. Our revised target of Rs320/share is based on
25xFY13CL earnings and implies ~3% downside.
Detergent volume growth springs a positive surprise at 19%
Hindustan Unilever’s FY11 annual report highlights the strong 13% volume
growth trend reported by the company during FY11. Detergent volume
growth of 19% was at an all time high. Soap volume growth (measured in no
of packs) was lower at 8%. Volume growth in foods & beverages was
disappointing with an exception of Kissan ketch-ups and Jams. ‘Coffee’
segment has been merged into ‘others’, taking away a data point for analysis.
RoE robust at 83%+ but working capital draws cash
HUL continues to drive a higher RoE for business although it declined 6 ppts
YoY to 83% due to lower earnings growth and working capital expansion.
Core working capital (inventories, sundry creditors and debtors) continues to
stay negative but receivable days increased by 4 days and inventories
increased by 8 days due to an overall increase in all the components viz. raw
materials, finished goods etc. Going forward we believe that RoEs will remain
around 80%.
Lowering A&P assumption leading to earnings upgrade
During the course of FY11, we have seen a progressive reduction in A&P from
15.7% of sales in 1QFY11 to 12.7%, a trend broadly inline with what we saw
for other FMCG players as players slowed down on A&P to partially offset
higher input cost. We now factor in a 50 bps lower A&P in FY12 and a further
30bps in FY13. (FY13 assumption of 13% still higher than 4QFY11).
Consequently, we raise FY12 and FY13 estimates by 3% and 6% respectively.
TP raised to Rs320/sh valued at 25x FY13CL earnings
Our new target price of Rs320/share (earlier Rs290/share) is based on
25xFY13CL – in line with the last 5 year average. The risk to our U-PF call on
the company is greater than expected softening in the A&P spend and a
correction in commodity prices.