UBS - Hindustan Unilever:: Competition and profitability are risks

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UBS Investment Research
Hindustan Unilever
Competition and profitability are risks
[ EXTRACT]
􀂄 Changing focus to a highly competitive category
Hindustan Unilever (HUL) is changing focus from its largest category, soaps and
detergents (about 40% of revenue) to personal products. The change in focus is a
result of HUL’s high penetration in the soaps category and the increased
profitability of the personal products segment. However, the personal products
category is witnessing increased competition as other companies, including ITC,
are also increasing their focus on the segment. HUL’s cuts in advertising and
promotion spending to maintain profitability could have an impact on volume
growth, in our view.
􀂄 ROE declines due to margin compression
ROE has declined from 123% in FY08 to 81.8% in FY11, as net profit margin has
fallen. Net profit margin declined from 12.9% in FY08 to 11.1% in FY11. We
believe margins will remain under pressure.
􀂄 Negative catalysts to play out in ensuing quarters
We maintain our Sell rating as we think: 1) competitive intensity will remain high;
2) reduced advertising spend could result in single digit volume growth in the
coming quarters; and 3) high volume growth expectations that might not
materialise are built into the share price.
􀂄 Valuation: maintain Sell rating , price target of Rs275.00
We maintain our Sell rating and price target of Rs275.00. 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%.