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Hindustan Unilever (HUVR)
Consumer products
Horizon looks hazy; downgrade to REDUCE. In the balance, downside risks to
business emerging, (1) Rupee depreciation would necessitate price increases—
managing input cost inflation would be challenging from here, (2) recently introduced
pack-size regulation (consumer products in standard packs) is negative for HUL, and (3)
further moderation in adspends (to mitigate gross margin pressure) looks unlikely. We
expect a strong 3QFY12E—sales growth of 16% and PAT growth of 22%—however,
the stock’s strong performance (38% absolute and 50% relative versus BSE-30 index
since our upgrade in May 2011) likely captures most of it. We now have a neutral view
with a negative bias (a preferred pick earlier). Downgrade to REDUCE (ADD earlier).
We remain believers in HUL’s medium-term prospects—its business model (disproportionate focus
on personal products, in our view) and demonstrated execution capabilities (direct distribution
expansion despite having the highest coverage in India). However, a confluence of factors prompts
the downgrade to REDUCE (ADD earlier)—(1) lofty expectations (Street is expecting a 25%
earnings growth in 2HFY12E), (2) strong stock performance in near past (38% absolute and 50%
relative performance since our upgrade in May 2011), (3) premium valuations (stock trades at 28X
FY2013E and at a 130% premium to BSE-30 index multiple—average for the past 10 years is
85%), and (4) few headwinds in the horizon:
Likely deceleration in volume growth trajectory in CY2012E
Pack-size regulation (consumer products in standard packs) is negative for HUL
Rupee depreciation would necessitate price increases—managing input cost inflation would be
challenging from here
Further moderation in adspends (to mitigate gross margin pressure) looks unlikely
Don’t forget P&G (irrationality in premium detergents segments cannot be ruled out)
Lofty Street expectations
Few mitigating factors exist though,
Strong and extended winter (even in January) and continued good performance of skincare—
we expect a strong 3QFY12E—16% sales growth, 25% EBITDA growth and 22% PAT growth
Sustaining input cost inflation has led to continued share gains for organised players from
unorganized segment, in our view
Detergent segment margins have likely bottomed out—benefits will likely accrue in 2HFY12E
Likely deceleration in volume growth trajectory in CY2012E
Risks of HUL’s volume growth moderating over the next one year are fairly high, in our view.
One of the major factors for HUL’s strong volume growth over the past 18 months was
strong performance in soaps and detergents due to the tailwind of (1) distribution gains, (2)
gains from unorganized segment (likely market share gains), and (3) good category growth.
However, we see risks to industry volume growth in FY2013E. We reiterate the view from
our sector note dated August 30, 2011 that the past three years have seen a confluence of
factors which have likely aided incremental spends on consumer products, (1) higher outlay
on NREGA, (2) wealth effect due to higher land prices, (3) benefits of farm loan waiver, and
(4) some benefits from the Sixth Pay Commission. As we look into medium term, we
highlight that most of these positive factors are in the base and lower incremental spends
have the potential to hurt demand for consumer products
Pack-size regulation (consumer products in standard packs) is negative for HUL
Media reports suggest that the government is likely to implement a standard pack size for
~19 consumer categories with effect from July 2012. If implemented, this could have
significant implications for FMCG products’ margins, in our view.
Most companies are worried as it takes away an important tool for margin management in
price-pointed low-unit packs (LUPs), which are essentially convenience price points. The
government’s move is presumably to help the consumer to make an informed purchase
decision, however, the actual result could be more inflationary if companies choose to
increase prices rather than reduce grammages (particularly for single-serve packs).
This could also result in lower penetration-led growth for select categories as companies will
be forced to vacate certain low price points due to its unattractive margin structure.
Moreover, in categories with higher unorganized salience (like soaps and detergents),
companies face the risk of irrational (read competitors who may not play by the rulebook)
competition. To elaborate, while the large organised players are likely to follow the new
packaging norms in letter and spirit, it could well become a competitive disadvantage for
them (according to industry experts, unorganized players may choose not to follow the
norm).
Britannia (biscuits), Nestle (baby foods, milk powder, coffee), HUL (soaps and detergents, tea
and coffee) will likely be impacted the most if the proposal is implemented.
Rupee depreciation would necessitate price increases—managing input cost
inflation would be challenging from here
About 60% of HUL’s inputs are Dollar-denominated/linked. The recent Rupee depreciation
versus USD (13% in 3QFY12) coupled with flat-to-inflationary trends in most of its inputs
poses risks to EBITDA margins in 1HCY12E. Effecting (further) price increases without
impacting volume growth in an environment of likely deceleration in volume growth is
challenging.
Further moderation in adspends (to mitigate gross margin pressure) looks unlikely
In the event of any potential deceleration in volume growth, HUL is likely to step up
promotional spends (clearly it will focus on volumes—and competitive growth—which is the
mandate given to HUL management by its parent company, in our view).
Don’t forget P&G (irrationality in premium detergents segments cannot be ruled out)
Price-war conditions in detergents mid-segment seem over. However, we would watch
competitive activities in top-end detergents very closely.
Our recent visits to the ‘bazaar’ suggest that rational competition in mid-segment detergents
has come back—the recent price increases by HUL and competition in CY2011 is testimony
for it. We highlight that the December 2011 retail price of HUL’s Rin is Rs70/kg (which was
the price in January 2010 prior to the price cut to Rs50) and P&G’s Tide is now at Rs84/kg
(Rs70/kg in January 2010). Interestingly, Tide is now at a 20% premium to Rin.
We would keenly watch for any potential activity by P&G in its ‘Ariel’ brand (top-end brand
which competes with HUL’s ‘Surf’). Industry sources indicate that while P&G has gained
market shares in the mid-segment with its success in ‘Tide’ brand, ‘Ariel’ still lags ‘Surf’ by a
substantial margin in the top-end. We highlight that during the detergents price war in
2004, P&G had initiated cuts in both Ariel and Tide whereas in 2010, the activity levels were
limited to Tide (and its variants). We see some risks in the horizon for HUL.
Lofty Street expectations
Consensus is expecting a 25% earnings growth for HUL in 2HFY12E (it has delivered 17% in
1HFY12). While we expect good 3QFY12E earnings growth of 22%, the profit outlook for
4QFY12E is muted due to input cost headwinds not neutralized (yet) by price increases.
Few mitigating factors exist though
Strong and extended winter (even in January) and continued good performance of
skincare. We expect a strong 3QFY12E—16% sales growth, 25% EBITDA growth and
22% PAT growth
Sustaining input cost inflation has led to continued share gains for organised players from
unorganized segment, in our view
Detergent segment margins have likely bottomed out—benefits will likely accrue in
2HFY12E
Downgrade to REDUCE (ADD earlier); remove HUL from the preferred pick list
In the balance, we see downside risks to HUL’s business emerging. While we expect a strong
3QFY12E—sales growth of 16% and PAT growth of 22%—the stock’s strong
outperformance (50% since our upgrade in May 2011) likely captures most of it, in our view.
We now have a neutral view with a negative bias (a preferred pick earlier). Downgrade to
REDUCE (ADD earlier). Retain earnings estimates—EPS of Rs11.8 and Rs14.2 for FY2012E
and FY2013E, respectively—and target price of Rs420 (we continue to value it at 29X
FY2013E).
Key risk is continued buoyancy in rural demand aiding HUL or significant correction in input
costs resulting in margin expansion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever (HUVR)
Consumer products
Horizon looks hazy; downgrade to REDUCE. In the balance, downside risks to
business emerging, (1) Rupee depreciation would necessitate price increases—
managing input cost inflation would be challenging from here, (2) recently introduced
pack-size regulation (consumer products in standard packs) is negative for HUL, and (3)
further moderation in adspends (to mitigate gross margin pressure) looks unlikely. We
expect a strong 3QFY12E—sales growth of 16% and PAT growth of 22%—however,
the stock’s strong performance (38% absolute and 50% relative versus BSE-30 index
since our upgrade in May 2011) likely captures most of it. We now have a neutral view
with a negative bias (a preferred pick earlier). Downgrade to REDUCE (ADD earlier).
We remain believers in HUL’s medium-term prospects—its business model (disproportionate focus
on personal products, in our view) and demonstrated execution capabilities (direct distribution
expansion despite having the highest coverage in India). However, a confluence of factors prompts
the downgrade to REDUCE (ADD earlier)—(1) lofty expectations (Street is expecting a 25%
earnings growth in 2HFY12E), (2) strong stock performance in near past (38% absolute and 50%
relative performance since our upgrade in May 2011), (3) premium valuations (stock trades at 28X
FY2013E and at a 130% premium to BSE-30 index multiple—average for the past 10 years is
85%), and (4) few headwinds in the horizon:
Likely deceleration in volume growth trajectory in CY2012E
Pack-size regulation (consumer products in standard packs) is negative for HUL
Rupee depreciation would necessitate price increases—managing input cost inflation would be
challenging from here
Further moderation in adspends (to mitigate gross margin pressure) looks unlikely
Don’t forget P&G (irrationality in premium detergents segments cannot be ruled out)
Lofty Street expectations
Few mitigating factors exist though,
Strong and extended winter (even in January) and continued good performance of skincare—
we expect a strong 3QFY12E—16% sales growth, 25% EBITDA growth and 22% PAT growth
Sustaining input cost inflation has led to continued share gains for organised players from
unorganized segment, in our view
Detergent segment margins have likely bottomed out—benefits will likely accrue in 2HFY12E
Likely deceleration in volume growth trajectory in CY2012E
Risks of HUL’s volume growth moderating over the next one year are fairly high, in our view.
One of the major factors for HUL’s strong volume growth over the past 18 months was
strong performance in soaps and detergents due to the tailwind of (1) distribution gains, (2)
gains from unorganized segment (likely market share gains), and (3) good category growth.
However, we see risks to industry volume growth in FY2013E. We reiterate the view from
our sector note dated August 30, 2011 that the past three years have seen a confluence of
factors which have likely aided incremental spends on consumer products, (1) higher outlay
on NREGA, (2) wealth effect due to higher land prices, (3) benefits of farm loan waiver, and
(4) some benefits from the Sixth Pay Commission. As we look into medium term, we
highlight that most of these positive factors are in the base and lower incremental spends
have the potential to hurt demand for consumer products
Pack-size regulation (consumer products in standard packs) is negative for HUL
Media reports suggest that the government is likely to implement a standard pack size for
~19 consumer categories with effect from July 2012. If implemented, this could have
significant implications for FMCG products’ margins, in our view.
Most companies are worried as it takes away an important tool for margin management in
price-pointed low-unit packs (LUPs), which are essentially convenience price points. The
government’s move is presumably to help the consumer to make an informed purchase
decision, however, the actual result could be more inflationary if companies choose to
increase prices rather than reduce grammages (particularly for single-serve packs).
This could also result in lower penetration-led growth for select categories as companies will
be forced to vacate certain low price points due to its unattractive margin structure.
Moreover, in categories with higher unorganized salience (like soaps and detergents),
companies face the risk of irrational (read competitors who may not play by the rulebook)
competition. To elaborate, while the large organised players are likely to follow the new
packaging norms in letter and spirit, it could well become a competitive disadvantage for
them (according to industry experts, unorganized players may choose not to follow the
norm).
Britannia (biscuits), Nestle (baby foods, milk powder, coffee), HUL (soaps and detergents, tea
and coffee) will likely be impacted the most if the proposal is implemented.
Rupee depreciation would necessitate price increases—managing input cost
inflation would be challenging from here
About 60% of HUL’s inputs are Dollar-denominated/linked. The recent Rupee depreciation
versus USD (13% in 3QFY12) coupled with flat-to-inflationary trends in most of its inputs
poses risks to EBITDA margins in 1HCY12E. Effecting (further) price increases without
impacting volume growth in an environment of likely deceleration in volume growth is
challenging.
Further moderation in adspends (to mitigate gross margin pressure) looks unlikely
In the event of any potential deceleration in volume growth, HUL is likely to step up
promotional spends (clearly it will focus on volumes—and competitive growth—which is the
mandate given to HUL management by its parent company, in our view).
Don’t forget P&G (irrationality in premium detergents segments cannot be ruled out)
Price-war conditions in detergents mid-segment seem over. However, we would watch
competitive activities in top-end detergents very closely.
Our recent visits to the ‘bazaar’ suggest that rational competition in mid-segment detergents
has come back—the recent price increases by HUL and competition in CY2011 is testimony
for it. We highlight that the December 2011 retail price of HUL’s Rin is Rs70/kg (which was
the price in January 2010 prior to the price cut to Rs50) and P&G’s Tide is now at Rs84/kg
(Rs70/kg in January 2010). Interestingly, Tide is now at a 20% premium to Rin.
We would keenly watch for any potential activity by P&G in its ‘Ariel’ brand (top-end brand
which competes with HUL’s ‘Surf’). Industry sources indicate that while P&G has gained
market shares in the mid-segment with its success in ‘Tide’ brand, ‘Ariel’ still lags ‘Surf’ by a
substantial margin in the top-end. We highlight that during the detergents price war in
2004, P&G had initiated cuts in both Ariel and Tide whereas in 2010, the activity levels were
limited to Tide (and its variants). We see some risks in the horizon for HUL.
Lofty Street expectations
Consensus is expecting a 25% earnings growth for HUL in 2HFY12E (it has delivered 17% in
1HFY12). While we expect good 3QFY12E earnings growth of 22%, the profit outlook for
4QFY12E is muted due to input cost headwinds not neutralized (yet) by price increases.
Few mitigating factors exist though
Strong and extended winter (even in January) and continued good performance of
skincare. We expect a strong 3QFY12E—16% sales growth, 25% EBITDA growth and
22% PAT growth
Sustaining input cost inflation has led to continued share gains for organised players from
unorganized segment, in our view
Detergent segment margins have likely bottomed out—benefits will likely accrue in
2HFY12E
Downgrade to REDUCE (ADD earlier); remove HUL from the preferred pick list
In the balance, we see downside risks to HUL’s business emerging. While we expect a strong
3QFY12E—sales growth of 16% and PAT growth of 22%—the stock’s strong
outperformance (50% since our upgrade in May 2011) likely captures most of it, in our view.
We now have a neutral view with a negative bias (a preferred pick earlier). Downgrade to
REDUCE (ADD earlier). Retain earnings estimates—EPS of Rs11.8 and Rs14.2 for FY2012E
and FY2013E, respectively—and target price of Rs420 (we continue to value it at 29X
FY2013E).
Key risk is continued buoyancy in rural demand aiding HUL or significant correction in input
costs resulting in margin expansion.
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