Hindustan Unilever - Earnings growth continues to lag expectations:: JPMorgan

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Hindustan Unilever Limited Underweight
HLL.BO, HUVR IN
Earnings growth continues to lag expectations


Hindustan Unilever’s Q1FY12 operational performance was below
expectations. Company reported Net Sales, EBITDA and PAT growth of 15%,
11% and 11% respectively. We see deceleration in volume growth and sharp
gross margin contraction (despite ~6% price hike) as key negatives from the
earnings. Though company limited EBITDA margin erosion by cutting down
on advertising and promotional spends significantly, this does not bode well
for future volume growth and sustainable margins.
 Volume growth moderates to 8.3%. Domestic consumer sales grew 15%
with volume growth at 8.3%, implying ~6.5% price/mix growth during the
quarter. While personal products segment registered healthy double digit
volume growth (aided by weak base to some extent), soaps & laundry
witnessed slower volume offtake impacted by recent price hikes. We expect
volume growth rates to remain at moderate levels in coming quarters (and
also as the base effect catches up), with price increases keeping overall
revenue growth rates at 14-15%.
 Gross margin pressures intensify: Higher prices for palm and crude oil
derivatives (key RM for soaps & laundry) led to a sharp 480bp y/y dip in
1Q gross margin. We expect input cost pressures to continue y/y in next 1-2
qtrs, though price increases and recent decline in palm oil prices should help
moderate the decline to some extent.
 Reduction in A&P spend (-420bp y/y) restricted EBITDA margin decline
to 50bp y/y during the quarter. A&P/Sales at 11.5% is the lowest in past
nine qtrs. Management noted that brand spends were particularly lower in
soaps & laundry segment. Personal Products and Foods continued to
witness higher A&P spends supporting new product launches. On a
structural basis we expect marketing spends to move up in the medium to
long term as competitive challenges persist and RM inflation becomes
benign.
 Earnings and TP. Our earnings estimates remain broadly unchanged. We
roll forward our target price timeframe to Mar’12 with a revised TP of
Rs295. At current levels stock is trading at 28xFY12E and 25x FY13E.