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Hindustan Unilever (HLL.BO)
Sell Equity Research
Sustaining high volume growth increasingly challenging; Sell
What's changed
Hindustan Unilever reported sales broadly in line with our estimates, but
gross margins were below estimates by 311 bp reflecting cost pressure.
EBITDA before A&P declined by 3%, the only decline in the last 20
quarters, and a severe 417 bp yoy cut in A&P spends resulted in EBITDA
slightly below our estimates. Key takeaways from the conference call
include: 1) A rebalance in growth split between volume and pricing, 2)
lower volume growth in soaps & detergents but robust for personal
products, 3) reduced A&P spends in commodity-based categories like
soaps & detergents and beverages but continued spends in personal
products and packaged foods, 4) rural growth faster than urban, driven by
better store reach.
Implications
We believe volume growth will trend downwards as: 1) the company will
need to raise prices to sustain margins, 2) a sustained cut in A&P spends
could result in a weakening market position for some brands, 3) high base
from robust double-digit volumes seen in the last three quarters of FY11
will impact growth in the current year (HUL faced issues in hair business in
1QFY11), 4) competitive intensity remains elevated in personal products,
and 5) the impact of inflation and higher interest rate will likely affect
customer sentiment. Any softening of raw material prices will be balanced
by higher competitive intensity, in our opinion. For FY12E, we model
revenue growth of 14%, with equal contribution from volume and pricing.
Valuation
We raise our FY12E EPS by 2.6% to account for higher other income
reported in 1QFY12. We retain our Sell rating and our 12-month target
price of Rs274. Our target price is based on 22X FY13E EPS.
Key risks
(1) Lower competitive intensity and sharp rebound in margins for laundry
segment, (2) higher-than-expected volume growth led by up-trading.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever (HLL.BO)
Sell Equity Research
Sustaining high volume growth increasingly challenging; Sell
What's changed
Hindustan Unilever reported sales broadly in line with our estimates, but
gross margins were below estimates by 311 bp reflecting cost pressure.
EBITDA before A&P declined by 3%, the only decline in the last 20
quarters, and a severe 417 bp yoy cut in A&P spends resulted in EBITDA
slightly below our estimates. Key takeaways from the conference call
include: 1) A rebalance in growth split between volume and pricing, 2)
lower volume growth in soaps & detergents but robust for personal
products, 3) reduced A&P spends in commodity-based categories like
soaps & detergents and beverages but continued spends in personal
products and packaged foods, 4) rural growth faster than urban, driven by
better store reach.
Implications
We believe volume growth will trend downwards as: 1) the company will
need to raise prices to sustain margins, 2) a sustained cut in A&P spends
could result in a weakening market position for some brands, 3) high base
from robust double-digit volumes seen in the last three quarters of FY11
will impact growth in the current year (HUL faced issues in hair business in
1QFY11), 4) competitive intensity remains elevated in personal products,
and 5) the impact of inflation and higher interest rate will likely affect
customer sentiment. Any softening of raw material prices will be balanced
by higher competitive intensity, in our opinion. For FY12E, we model
revenue growth of 14%, with equal contribution from volume and pricing.
Valuation
We raise our FY12E EPS by 2.6% to account for higher other income
reported in 1QFY12. We retain our Sell rating and our 12-month target
price of Rs274. Our target price is based on 22X FY13E EPS.
Key risks
(1) Lower competitive intensity and sharp rebound in margins for laundry
segment, (2) higher-than-expected volume growth led by up-trading.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
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