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Key Takeaways
Proportion of realization in sales growth increasing
The FMCG sector is maintaining double-digit sales growth, though the proportion of
realization in overall sales is increasing.
According to AC Nielsen, Urban India is growing at a faster rate than Rural India.
However, Hindustan Unilever (HUVR) has indicated that Rural India is growing faster.
Competitive intensity remains high; sharp margin expansion unlikely
Competitive intensity in categories like laundry and shampoos remains high; lower
ad spend does not indicate decline in competitive intensity in the market. Rin continues
to gain share in a category where HUVR competes with players like P&G and Ghari.
Cost of inputs like PFAD, LAB, packaging, etc has risen sharply. HUL is following a
strategy of balancing volume growth and profitability by undertaking calibrated price
increases. However, price increases are insufficient to cover the input cost inflation.
India offers huge growth opportunity but the competition is likely to remain intense.
HUVR is looking at competitive growth. Margins are low and are unlikely to increase.
Uniquely placed to capture growth across segments
HUVR is uniquely placed to capture the growth opportunity across income classes,
as it has brands across price points and segments.
The company is launching new products for emerging consumers. It is focusing on
categories like hair conditioners, fabric conditioners, deodorants, and food products
like Knorr Soupy Noodles, Kissan Creamy Spread and Kissan Soy Juice.
HUVR is creating channels of tomorrow, with strong alignment of products and
services catering to the requirements of modern trade and is also expanding
distribution in Rural India. It has added 0.5m direct retail points in FY11 and aims to
increase the distribution gap with competitors.
Valuation and view
We expect gross margin to expand in the coming quarters, led by (1) 22% decline
in PFAD prices from the peak, (2) calibrated increase in detergent prices (10-17%)
and toilet soap prices (5-11%) over the past six months, and (3) above teens volume
growth in the personal care category.
We expect volume growth to soften, led by (1) the impact of high price increases in
soaps and detergents in the current inflationary environment, and (2) a high base
effect, as FY11 volume grew 16% for detergents and 8% for toilet soaps (much
above long-term industry growth). We estimate 13% PAT CAGR over FY11-13.
The stock trades at 28x FY12E EPS of INR11.2 and 24.8x FY13E EPS of INR12.6.
Neutral.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key Takeaways
Proportion of realization in sales growth increasing
The FMCG sector is maintaining double-digit sales growth, though the proportion of
realization in overall sales is increasing.
According to AC Nielsen, Urban India is growing at a faster rate than Rural India.
However, Hindustan Unilever (HUVR) has indicated that Rural India is growing faster.
Competitive intensity remains high; sharp margin expansion unlikely
Competitive intensity in categories like laundry and shampoos remains high; lower
ad spend does not indicate decline in competitive intensity in the market. Rin continues
to gain share in a category where HUVR competes with players like P&G and Ghari.
Cost of inputs like PFAD, LAB, packaging, etc has risen sharply. HUL is following a
strategy of balancing volume growth and profitability by undertaking calibrated price
increases. However, price increases are insufficient to cover the input cost inflation.
India offers huge growth opportunity but the competition is likely to remain intense.
HUVR is looking at competitive growth. Margins are low and are unlikely to increase.
Uniquely placed to capture growth across segments
HUVR is uniquely placed to capture the growth opportunity across income classes,
as it has brands across price points and segments.
The company is launching new products for emerging consumers. It is focusing on
categories like hair conditioners, fabric conditioners, deodorants, and food products
like Knorr Soupy Noodles, Kissan Creamy Spread and Kissan Soy Juice.
HUVR is creating channels of tomorrow, with strong alignment of products and
services catering to the requirements of modern trade and is also expanding
distribution in Rural India. It has added 0.5m direct retail points in FY11 and aims to
increase the distribution gap with competitors.
Valuation and view
We expect gross margin to expand in the coming quarters, led by (1) 22% decline
in PFAD prices from the peak, (2) calibrated increase in detergent prices (10-17%)
and toilet soap prices (5-11%) over the past six months, and (3) above teens volume
growth in the personal care category.
We expect volume growth to soften, led by (1) the impact of high price increases in
soaps and detergents in the current inflationary environment, and (2) a high base
effect, as FY11 volume grew 16% for detergents and 8% for toilet soaps (much
above long-term industry growth). We estimate 13% PAT CAGR over FY11-13.
The stock trades at 28x FY12E EPS of INR11.2 and 24.8x FY13E EPS of INR12.6.
Neutral.
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