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UBS Investment Research
Hindustan Unilever
A d spend cut again, volumes +8%
Event: revenue up 15% yoy, EBITDA up 13% yoy
Hindustan Unilever (HUL) reported Q1 revenue of Rs55bn, up 15% yoy, versus
UBS’s estimate of Rs54bn due to price increases and improving mix. Underlying
volume growth of 8.3% was in line with UBS’s estimate. EBITDA grew 13% to
Rs6.8bn (UBS estimate: Rs6.5bn), as HUL cut ad spend by 16% yoy taking
ad/sales from 15.7% to 11.5% of sales (UBS estimate: 12.7% ad/sales). COGS
were 55.9% (54.3% in Q411) reflecting the worsening COGS situation.
Impact: PP has taken off; S&D still affected by competition
HUL has invested significantly in its high-margin personal product businesses
(revenue up 19%) where a better mix has resulted in EBIT growth of 22%, while
the soaps and detergent (S&D) business revenue grew 13% but EBIT declined 5%
in Q1FY12. S&D’s margin improvement has been due to the cut in spends —
volumes have also suffered.
Action: ad spend needs to return
HUL’s volumes have grown in double digits over the past few quarters but the
impact of reduced A&P and cuts in promotional spend is evident in the single-digit
volume growth this quarter. We believe that in this highly competitive market
HUL will have to increase ad spend to garner incremental sales in the ensuing
quarters.
Valuation: maintain Sell rating, price target of Rs275
We maintain our Sell rating with a price target of Rs275. We derive our price
target from a DCF-based methodology and explicitly forecast long-term valuation
drivers using UBS’s VCAM tool. We assume a WACC of 10.8%.
Hindustan Unilever
Hindustan Lever is the leading household goods and food products
company in the country. It has a dominant share in each of its key
businesses: personal care, laundry, tea and branded staple foods. An
unmatched distribution reach covering directly over a million retailers
and a wide product portfolio with price-competitive products underpin
its market leadership. Management is focusing on rationalising its
brand portfolio to drive a sales growth rebound and has identified 30
core brands to which it will commit maximum resources for growth.
Statement of Risk
We think the key risks that could affect the sector include continued
upward movement of downstream petrochemical products and higher
agri-commodity based raw material costs, and the inability of branded
consumer companies to pass on price increases in an increasingly
competitive market. The sector has low corporate tax rates because
factories are located in areas that are designated as tax benefit zones;
any change in this law could affect earnings, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hindustan Unilever
A d spend cut again, volumes +8%
Event: revenue up 15% yoy, EBITDA up 13% yoy
Hindustan Unilever (HUL) reported Q1 revenue of Rs55bn, up 15% yoy, versus
UBS’s estimate of Rs54bn due to price increases and improving mix. Underlying
volume growth of 8.3% was in line with UBS’s estimate. EBITDA grew 13% to
Rs6.8bn (UBS estimate: Rs6.5bn), as HUL cut ad spend by 16% yoy taking
ad/sales from 15.7% to 11.5% of sales (UBS estimate: 12.7% ad/sales). COGS
were 55.9% (54.3% in Q411) reflecting the worsening COGS situation.
Impact: PP has taken off; S&D still affected by competition
HUL has invested significantly in its high-margin personal product businesses
(revenue up 19%) where a better mix has resulted in EBIT growth of 22%, while
the soaps and detergent (S&D) business revenue grew 13% but EBIT declined 5%
in Q1FY12. S&D’s margin improvement has been due to the cut in spends —
volumes have also suffered.
Action: ad spend needs to return
HUL’s volumes have grown in double digits over the past few quarters but the
impact of reduced A&P and cuts in promotional spend is evident in the single-digit
volume growth this quarter. We believe that in this highly competitive market
HUL will have to increase ad spend to garner incremental sales in the ensuing
quarters.
Valuation: maintain Sell rating, price target of Rs275
We maintain our Sell rating with a price target of Rs275. We derive our price
target from a DCF-based methodology and explicitly forecast long-term valuation
drivers using UBS’s VCAM tool. We assume a WACC of 10.8%.
Hindustan Unilever
Hindustan Lever is the leading household goods and food products
company in the country. It has a dominant share in each of its key
businesses: personal care, laundry, tea and branded staple foods. An
unmatched distribution reach covering directly over a million retailers
and a wide product portfolio with price-competitive products underpin
its market leadership. Management is focusing on rationalising its
brand portfolio to drive a sales growth rebound and has identified 30
core brands to which it will commit maximum resources for growth.
Statement of Risk
We think the key risks that could affect the sector include continued
upward movement of downstream petrochemical products and higher
agri-commodity based raw material costs, and the inability of branded
consumer companies to pass on price increases in an increasingly
competitive market. The sector has low corporate tax rates because
factories are located in areas that are designated as tax benefit zones;
any change in this law could affect earnings, in our view.
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