Hindustan Unilever:: Lower A&P to the rescue ::CLSA

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Lower A&P to the rescue
Hindustan Unilever’s 1QFY12 results highlight the delayed impact of
higher commodity prices which was completely absorbed by lower A&P
expenditure which was down 17% YoY or 4+ppts thanks to the high
base. While the YoY impact of A&P will keep on shrinking, potential
reduction in RM costs will be a couple of quarters away. Onus will be on
HUL to balance the price hikes and volume growth / market share, which
will be a tough job in an environment of slowing growth. At 28x 12m
forward the stock is fully valued for a 15% earnings Cagr business.
1QFY12 results better than expected
Hindustan Unilever’s 1QFY12 pre exceptional earnings grew 12% YoY to
Rs5.8bn – 5% higher than our expectations driven by lower A&P. Reported
profits were higher Rs6.3bn due to profit on sale of properties. Turnaround of
‘water’ business has also contributed to the earnings beat. The company is
moving away from Direct-to-home model to retail distribution.
Revenue growth robust; Volume growth slows, will slow further
HUL’s volume growth has slowed from 13% in FY11 to 8.3% in 1QFY12 as
expected. Realisation increase improved substantially from -2% in FY11 to
6.5% in 1Q – which was 1ppt higher than our estimates. Volume slowdown is
also attributable partially to the withdrawal of promotional schemes. Volume
growth in personal care continues in double digits, implying that the volume
growth in soaps and detergents has slowed considerably into low single digits.
RM cost pressures further intensify, offset by soft A&P
As is usually the case, higher raw material costs reflected in the P&L with
about 2 quarters of lag and reached the all-time high of 56% (as a % of net
sales – up 5 ppts YoY) during 1Q. 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. Reduction was attributable 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 derived large savings in costs with lower A&P and the
company has guided for the full year A&P to be between 12-13% of sales (as
against) 11.5% in 1Q implying some pick-up in the subsequent quarters. At
the same time, potential lowering in commodity prices will not reflect at least
till 3QFY12. The next couple of quarters, therefore, would be tough unless
product price hikes are effected. At 28x 12m forward the stock is fully valued
for a 15% earnings cagr business.