CLSA- HINDUSTAN UNILEVER Lower A&P to the rescue Valuations remain expensive. Maintain U-PF.

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- HINDUSTAN UNILEVER
Lower A&P to the rescue
Valuations remain expensive. Maintain U-PF.


Hindustan Unilever’s 1QFY12 results highlight the delayed impact of higher
commodity prices, which were completely absorbed by lower A&P spending
(down 17% YoY or 4+ppts thanks to the high base). While the YoY impact
of A&P will continue shrinking, the potential reduction in RM costs will be a
couple of quarters away. HUL will have to balance price hikes with volume
growth and market share: a tough job in an environment of slowing
growth. At 28x 12-month forward PE, the stock is fully valued for a 15%-
earnings-Cagr business.
Results better than expected in 1QFY12.  Hindustan Unilever’s (HUVR
IB - Rs322.7 - U-PF) 1QFY12 pre-exceptional earnings grew 12% YoY to
Rs5.8bn - 5% higher than our expectations - driven by lower A&P.
Reported profits were Rs6.3bn higher due to profits on the sale of
properties. A turnaround in the ‘water’ business also contributed to the
earnings beat: the company is moving away from the direct-to-home
model in favour of a retail distribution approach.
Raw material costs: low base for next 2Qs
RM costs as a % of sales
44
46
48
50
52
54
56
58
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
(%)
Source: Company, CLSA Asia-Pacific Markets
Revenue growth robust. HUL’s volume growth slowed from 13% in FY11
to 8.3% in 1QFY12, as we had expected. Its increase in realisation
improved substantially from -2% in FY11 to 6.5% in 1Q - 1ppt higher than
our estimates. The volume slowdown is also partly due to the withdrawal
of promotional schemes. Volume growth in personal care continues to be
double digit, implying that soaps and detergents have slowed considerably
to low single digits.
RM cost pressures further intensify. As is usually the case, higher raw
material costs shows up in the P&L with about a two quarter lag: they
reached an all-time high of 56% in 1Q (as a % of net sales - up 5ppts YoY).
This was largely offset by a higher-than-expected reduction in
advertisement and promotional expenditure, which was down by more
than 4ppts YoY or 16% YoY. The reduction was due to lower promotional
activities (partially reflected in lower volumes) and lower adspend in
commodity-driven segments such as soaps and detergents.
Stock is fully valued; potential  slowdown may drive-up costs.  The
company has earned large cost savings from lower A&P, and management
has guided for full-year A&P to be 12-13% of sales as against 11.5% in 1Q,
implying some pickup in the coming quarters. At the same time,
potentially lower commodity prices will not feed through until 3QFY12 at
the earliest. The next couple of quarters, therefore, will be tough unless
product price hikes are implemented. At 28x 12-month forward PE, the
stock is fully valued for a 15%-earnings-Cagr business. We maintain our
Underperform rating and our Rs320 target.