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UBS Investment Research
Hindustan Unilever
T akeaways from conference call
�� Event: HUL conference call takeaways
Some of the key takeaways from the Q1 FY12 call were: 1) market slowdown in
soaps & detergents; 2) personal products segment’s volumes grew +15% in volume
terms; 3) management believes A&P spends are a function of: a) the level of
competitor and own activity, and b) product launches and innovations; and 4)
outlook: costs will remain high and the competitive environment will remain
intense.
�� Impact: management guiding for price increases
With the volatile commodity outlook, management has hinted at more price
increases. We believe the outlook for HUL’s volumes seems less buoyant, while on
accessing consumer companies’ results, we believe market volume growth remains
robust. Management has reiterated that relative share positioning is more important
than absolute market share maintenance. Given commodity pressures and
competitive intensity remain high, we do not see a catalyst for the share price.
�� Action: market share and profit tightrope
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 these highly competitive markets,
HUL will have to increase ad spend to garner volume growth in coming quarters.
�� Valuation: maintain Sell rating with a 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 pricecompetitive
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
T akeaways from conference call
�� Event: HUL conference call takeaways
Some of the key takeaways from the Q1 FY12 call were: 1) market slowdown in
soaps & detergents; 2) personal products segment’s volumes grew +15% in volume
terms; 3) management believes A&P spends are a function of: a) the level of
competitor and own activity, and b) product launches and innovations; and 4)
outlook: costs will remain high and the competitive environment will remain
intense.
�� Impact: management guiding for price increases
With the volatile commodity outlook, management has hinted at more price
increases. We believe the outlook for HUL’s volumes seems less buoyant, while on
accessing consumer companies’ results, we believe market volume growth remains
robust. Management has reiterated that relative share positioning is more important
than absolute market share maintenance. Given commodity pressures and
competitive intensity remain high, we do not see a catalyst for the share price.
�� Action: market share and profit tightrope
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 these highly competitive markets,
HUL will have to increase ad spend to garner volume growth in coming quarters.
�� Valuation: maintain Sell rating with a 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 pricecompetitive
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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