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Hindustan Unilever (HUVR)
Consumer products
Why we remain positive on HUL? We continue to recommend ADD rating on HUL as
we see (1) detergents margins have likely bottomed out—the 24% price increase in
‘Rin’ powder in February-July 2011 evidences it, in our view, (2) continuing good
volume growth in personal products (though rest of FY2012E may likely witness
moderation in overall volume growth due to impact of pantry stock adjustments),
(3) moderation in adspends in soaps and detergents is not a worry as adspends in lesser
penetrated personal product categories is still high, and (4) can irrational competition
impact more categories? Unlikely, in our view.
We revisit our positive arguments in our HUL upgrade note of May 2011 and do a status
update on the key drivers.
Detergents margins have likely bottomed out
The recent price increases by HUL and competition in 1HCY11 clearly indicate that the rational
competitive environment in detergents category is likely coming back. We highlight that HUL has
implemented significant price increases in Surf Excel powder (~10% in most variants), Rin powder
(24% price increase in five months between February and July 2011 – Rs67/kg in July 2011 versus
Rs54/kg in February 2011) and Wheel powder (~10% effective price hike).
The current soaps and detergents margins are the lowest ever; the management recently
commented that double-digit margins are possible (without guiding on the timeline though).
While we believe that the road to recovery could be long and winding in detergents business, the
category EBITDA margins of ~2% currently (implying that mid and mass segment are likely
operating at negative EBITDA) are clearly not sustainable for the industry—HUL as well as for
competition.
Continuing good growth in personal products
Sustained good growth in personal products (PP) provides comfort. HUL’s personal products
business (comprising hair care, oral care and skin care) has demonstrated good volume-led growth
over the past two years. Moreover, personal care now accounts for ~60% of HUL’s profits
implying that the reliance on highly commoditized soaps and detergents business has reduced.
HUL’s PP has grown at ~13% in volumes in FY2009-11, in our view and we expect the trajectory
to continue. The company has relaunched most of the categories within PP as well as had a spate
of new launches. Contribution of personal products in the overall sales mix has increased over the
years.
Moderation in volume growth trajectory likely due to impact of pantry-stock
adjustments
After posting ~13% volume growth in FY2011, HUL reported 8.3% volume growth in
1QFY12. We expect the overall reported volumes to slow down further in the rest of
FY2012E driven by (1) high base due to promotions and price-cut led volume gains in
detergents in FY2011 and (2) impact of pantry-stocks adjustment in the rest of FY2012E.
The company has implemented effective price increases in detergents category through
grammage reductions as well—Surf Excel (~9%), Rin bar (~20%) and Wheel powder (~10%)
in 1HCY11. Exhibit 1 gives the quarterly volume and pricing growth for the company.
We are not concerned with likely lower volumes for HUL in the rest of FY2012E as personal
products (PP) volume growth continue to be consistently in double digits for the past two
years and the spate of new launches and relaunches in FY2011 will likely help HUL to
maintain the good growth. We further highlight that PP accounts for ~60% of HUL’s profits
in FY2011 versus 39% in FY2003—HUL’s reliance on soaps and detergents (which are
agreeably more sensitive to commodity prices) is much lower currently.
Moderation in adspends is not a worry
Contrary to Street, moderation in adspends does not worry us as the company is
maintaining competitive spends (measured as share of voice/share of market), in our view.
Lower category spends in soaps and detergents (which are anyway highly penetrated
categories) may not impact its market growth. Moreover, HUL is likely to focus on
consolidation of FY2011 new launches in FY2012E, in our view (implying relatively lower
adspends). HUL spent ~Rs4-5 bn on new launches in FY2011, in our view (out of total
adspends of Rs28 bn) (Exhibit 4). It is pertinent to note that the industry-level adspends in
soaps and detergents have been calibrated as commodity inflation hits these categories the
most (Exhibit 3), whereas adspends in the other consumer categories have increased even in
1QFY12.
Can irrational competition impact more categories? Unlikely, in our view
Considering that the competitive activity levels in many categories are dictated by the MNCs’
attempt to build a stronger business in India (P&G, L’Oreal, Beiersdorf etc.) and entry of
players with deep pockets (ITC), one of the key worries for HUL is whether competitive
activity can turn irrational in many of its categories.
The scenario of irrational competitive activity spreading beyond detergents and shampoo is
unlikely in our view—the category dynamics would dictate the same (Exhibit 5). For example,
categories like skincare could likely see elevated marketing spends for a long period,
however, HUL could potentially benefit as (1) market development expenses now gets
shared by many players, (2) relatively underpenetrated categories could grow faster, and (3)
HUL could potentially improve gross margins (GM) as the skincare category and its subsegments
has higher GM than the blended GM for the company. However, we believe that
oralcare category is exposed to irrational competition, if any, in the event of P&G’s entry (it
accounts for ~6% of HUL’s sales and profits, in our view).
Retain ADD
Our confidence on FY2012E earnings estimates continues to be high as we believe, (1)
continuing good growth in PP, (2) likely bottoming out of detergents margins and (3)
adspends moderation. We retain ADD rating and target price of Rs340, we continue to
value HUL at 25X FY2013E for EPS estimate of Rs11.3 (+17.7% yoy growth) and FY2013E
EPS of Rs13.4 (+17.9% growth yoy). Key risk is acceleration in input cost inflation and
further price hikes could potentially hurt sector demand growth and HUL’s volume growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever (HUVR)
Consumer products
Why we remain positive on HUL? We continue to recommend ADD rating on HUL as
we see (1) detergents margins have likely bottomed out—the 24% price increase in
‘Rin’ powder in February-July 2011 evidences it, in our view, (2) continuing good
volume growth in personal products (though rest of FY2012E may likely witness
moderation in overall volume growth due to impact of pantry stock adjustments),
(3) moderation in adspends in soaps and detergents is not a worry as adspends in lesser
penetrated personal product categories is still high, and (4) can irrational competition
impact more categories? Unlikely, in our view.
We revisit our positive arguments in our HUL upgrade note of May 2011 and do a status
update on the key drivers.
Detergents margins have likely bottomed out
The recent price increases by HUL and competition in 1HCY11 clearly indicate that the rational
competitive environment in detergents category is likely coming back. We highlight that HUL has
implemented significant price increases in Surf Excel powder (~10% in most variants), Rin powder
(24% price increase in five months between February and July 2011 – Rs67/kg in July 2011 versus
Rs54/kg in February 2011) and Wheel powder (~10% effective price hike).
The current soaps and detergents margins are the lowest ever; the management recently
commented that double-digit margins are possible (without guiding on the timeline though).
While we believe that the road to recovery could be long and winding in detergents business, the
category EBITDA margins of ~2% currently (implying that mid and mass segment are likely
operating at negative EBITDA) are clearly not sustainable for the industry—HUL as well as for
competition.
Continuing good growth in personal products
Sustained good growth in personal products (PP) provides comfort. HUL’s personal products
business (comprising hair care, oral care and skin care) has demonstrated good volume-led growth
over the past two years. Moreover, personal care now accounts for ~60% of HUL’s profits
implying that the reliance on highly commoditized soaps and detergents business has reduced.
HUL’s PP has grown at ~13% in volumes in FY2009-11, in our view and we expect the trajectory
to continue. The company has relaunched most of the categories within PP as well as had a spate
of new launches. Contribution of personal products in the overall sales mix has increased over the
years.
Moderation in volume growth trajectory likely due to impact of pantry-stock
adjustments
After posting ~13% volume growth in FY2011, HUL reported 8.3% volume growth in
1QFY12. We expect the overall reported volumes to slow down further in the rest of
FY2012E driven by (1) high base due to promotions and price-cut led volume gains in
detergents in FY2011 and (2) impact of pantry-stocks adjustment in the rest of FY2012E.
The company has implemented effective price increases in detergents category through
grammage reductions as well—Surf Excel (~9%), Rin bar (~20%) and Wheel powder (~10%)
in 1HCY11. Exhibit 1 gives the quarterly volume and pricing growth for the company.
We are not concerned with likely lower volumes for HUL in the rest of FY2012E as personal
products (PP) volume growth continue to be consistently in double digits for the past two
years and the spate of new launches and relaunches in FY2011 will likely help HUL to
maintain the good growth. We further highlight that PP accounts for ~60% of HUL’s profits
in FY2011 versus 39% in FY2003—HUL’s reliance on soaps and detergents (which are
agreeably more sensitive to commodity prices) is much lower currently.
Moderation in adspends is not a worry
Contrary to Street, moderation in adspends does not worry us as the company is
maintaining competitive spends (measured as share of voice/share of market), in our view.
Lower category spends in soaps and detergents (which are anyway highly penetrated
categories) may not impact its market growth. Moreover, HUL is likely to focus on
consolidation of FY2011 new launches in FY2012E, in our view (implying relatively lower
adspends). HUL spent ~Rs4-5 bn on new launches in FY2011, in our view (out of total
adspends of Rs28 bn) (Exhibit 4). It is pertinent to note that the industry-level adspends in
soaps and detergents have been calibrated as commodity inflation hits these categories the
most (Exhibit 3), whereas adspends in the other consumer categories have increased even in
1QFY12.
Can irrational competition impact more categories? Unlikely, in our view
Considering that the competitive activity levels in many categories are dictated by the MNCs’
attempt to build a stronger business in India (P&G, L’Oreal, Beiersdorf etc.) and entry of
players with deep pockets (ITC), one of the key worries for HUL is whether competitive
activity can turn irrational in many of its categories.
The scenario of irrational competitive activity spreading beyond detergents and shampoo is
unlikely in our view—the category dynamics would dictate the same (Exhibit 5). For example,
categories like skincare could likely see elevated marketing spends for a long period,
however, HUL could potentially benefit as (1) market development expenses now gets
shared by many players, (2) relatively underpenetrated categories could grow faster, and (3)
HUL could potentially improve gross margins (GM) as the skincare category and its subsegments
has higher GM than the blended GM for the company. However, we believe that
oralcare category is exposed to irrational competition, if any, in the event of P&G’s entry (it
accounts for ~6% of HUL’s sales and profits, in our view).
Retain ADD
Our confidence on FY2012E earnings estimates continues to be high as we believe, (1)
continuing good growth in PP, (2) likely bottoming out of detergents margins and (3)
adspends moderation. We retain ADD rating and target price of Rs340, we continue to
value HUL at 25X FY2013E for EPS estimate of Rs11.3 (+17.7% yoy growth) and FY2013E
EPS of Rs13.4 (+17.9% growth yoy). Key risk is acceleration in input cost inflation and
further price hikes could potentially hurt sector demand growth and HUL’s volume growth.
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