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HINDUSTAN UNILEVER LIMITED (HUL)
PRICE: RS.391 RECOMMENDATION: REDUCE
TARGET PRICE: RS.379 FY13E P/E: 26.8X
HUL's strong price performance in recent quarters has been backed by
earnings performance in a challenging economic environment. Several
positives for near-term earnings remain - expect competitive intensity to
remain contained, and expect HUL's brand investments to help industryoutperformance
on the topline. Going into FY13, however, we believe
pricing as well as volume growth shall be under pressure (given high base),
and structural issues shall dominate the determination of revenue growth.
Near-term, HUL profits may face headwinds of a weaker rupee, with
continued strain on gross margins, and levers of A&P spends are limited.
Valuations enjoyed by HUL at CMP are, in our opinion, aggressive, and take
for granted long-term positives for the company, in categories where
competitive dynamics are less than apparent at the present stage. Earnings
disappointments may be met with meaningful compression in multiples,
while upsides are contained. REDUCE, with a one-year (Jan, 2013) price
target of Rs.379.
q On a rebound: After a decade of underperforming peers, HUL seems to be hitting
the right notes, on both topline and the bottom-line. The company has surprised
the street positively in recent quarters in volume growth as well as margins;
earnings estimates have therefore seen upward revisions and valuations
have seen expansion.
q Current Environment Conducive to HUL, expect healthy earnings growth
in FY12/FY13: Current environment of the industry, where high inflation (contained
consumer demand) and high raw material prices are key highlights, is favorable
to HUL, we think, on account of (at least temporary) cease -fire in price
wars that had broken out in FY10/FY11. HUL has also reaped benefits of premium
pricing on certain innovations that have been relatively insulated from
price competition. These shall enable the company to register strong growth relative
to peers in the near future. We forecast 16%/12% revenue growth in
FY12E/ FY13E. Assuming the current environment of competition fatigue and
healthy co-existence in the industry prevails for a few more quarters, we believe
FY12E/ FY13E earnings shall grow 23% / 20%.
q Structural issues remain, preclude aggressive long-term assumptions:
HUL has, over the past decade underperformed peers significantly, due to which
its share in the total FMCG pie has declined from ~25% (2000) to ~14% (2010).
The company's revenues continue to be bent toward soaps and detergents - categories
that are well-penetrated, and have been seeing the entry of aggressive
rivals. Longer-term, there is reason to believe that pricing pressures shall continue
to exist in these categories. While the company's personal products portfolio
continues to see strong growth and margins, we believe it is difficult to make a
case for overall long - term EBITDA margins of over 16%, and revenue growth of
11% for the next decade (as factored in to our assumptions), unless the revenue
composition of the company changes meaningfully.
q Valuations incorporate near-term positives; initiate with REDUCE, Price
Target Rs 370: HUL continues to enjoy benefits of a pause in aggressive pricing
by rivals in its key segments, as prices have seen an uptrend in 1HFY12/ 3QFY12.
It is likely that the company shall be able to pass on higher raw material prices to
customers, in the immediate term - although the sustenance of pricing as a lever
in managing margins will reduce if the weakness in the rupee were to persist.
With somewhat higher weightage provided to the company's near-term achievements,
we assess the (DCF- based) fair value of HUL stock at Rs 379/ share. This
corresponds to 26x PER FY13E. Given CMP, we see little opportunity in the
stock. We would be more comfortable entering the stock at lower levels. We
initiate with REDUCE.
q Triggers: HUL is expected to maintain industry outperformance and likely beat
analyst estimates in the coming quarters, if the improved competitive dynamics
in key segments were to remain (our FY13 EPS estimate is 4% above consensus).
However, we believe minor earnings surprises are unlikely to impress the
markets, given CMP. Weakness in earnings, which could be precipitated by raw
material expenses (compounded by a weak rupee), could be a potential trigger
for negative earnings revisions/ de-rating of the stock. We also tend to think that
as uncertainty over ITC's near-term excise liabilities eases, HUL's valuations may
see some compression (likely March-April 2012).
q Risks: Upside risks include continued surprises in FY13/FY14 on A&P spends, and
declines in raw material prices. Downside risks to our estimates and price target
arise from likelihood of greater competitive intensity, especially in soaps and
detergents, and raw material and forex risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDUSTAN UNILEVER LIMITED (HUL)
PRICE: RS.391 RECOMMENDATION: REDUCE
TARGET PRICE: RS.379 FY13E P/E: 26.8X
HUL's strong price performance in recent quarters has been backed by
earnings performance in a challenging economic environment. Several
positives for near-term earnings remain - expect competitive intensity to
remain contained, and expect HUL's brand investments to help industryoutperformance
on the topline. Going into FY13, however, we believe
pricing as well as volume growth shall be under pressure (given high base),
and structural issues shall dominate the determination of revenue growth.
Near-term, HUL profits may face headwinds of a weaker rupee, with
continued strain on gross margins, and levers of A&P spends are limited.
Valuations enjoyed by HUL at CMP are, in our opinion, aggressive, and take
for granted long-term positives for the company, in categories where
competitive dynamics are less than apparent at the present stage. Earnings
disappointments may be met with meaningful compression in multiples,
while upsides are contained. REDUCE, with a one-year (Jan, 2013) price
target of Rs.379.
q On a rebound: After a decade of underperforming peers, HUL seems to be hitting
the right notes, on both topline and the bottom-line. The company has surprised
the street positively in recent quarters in volume growth as well as margins;
earnings estimates have therefore seen upward revisions and valuations
have seen expansion.
q Current Environment Conducive to HUL, expect healthy earnings growth
in FY12/FY13: Current environment of the industry, where high inflation (contained
consumer demand) and high raw material prices are key highlights, is favorable
to HUL, we think, on account of (at least temporary) cease -fire in price
wars that had broken out in FY10/FY11. HUL has also reaped benefits of premium
pricing on certain innovations that have been relatively insulated from
price competition. These shall enable the company to register strong growth relative
to peers in the near future. We forecast 16%/12% revenue growth in
FY12E/ FY13E. Assuming the current environment of competition fatigue and
healthy co-existence in the industry prevails for a few more quarters, we believe
FY12E/ FY13E earnings shall grow 23% / 20%.
q Structural issues remain, preclude aggressive long-term assumptions:
HUL has, over the past decade underperformed peers significantly, due to which
its share in the total FMCG pie has declined from ~25% (2000) to ~14% (2010).
The company's revenues continue to be bent toward soaps and detergents - categories
that are well-penetrated, and have been seeing the entry of aggressive
rivals. Longer-term, there is reason to believe that pricing pressures shall continue
to exist in these categories. While the company's personal products portfolio
continues to see strong growth and margins, we believe it is difficult to make a
case for overall long - term EBITDA margins of over 16%, and revenue growth of
11% for the next decade (as factored in to our assumptions), unless the revenue
composition of the company changes meaningfully.
q Valuations incorporate near-term positives; initiate with REDUCE, Price
Target Rs 370: HUL continues to enjoy benefits of a pause in aggressive pricing
by rivals in its key segments, as prices have seen an uptrend in 1HFY12/ 3QFY12.
It is likely that the company shall be able to pass on higher raw material prices to
customers, in the immediate term - although the sustenance of pricing as a lever
in managing margins will reduce if the weakness in the rupee were to persist.
With somewhat higher weightage provided to the company's near-term achievements,
we assess the (DCF- based) fair value of HUL stock at Rs 379/ share. This
corresponds to 26x PER FY13E. Given CMP, we see little opportunity in the
stock. We would be more comfortable entering the stock at lower levels. We
initiate with REDUCE.
q Triggers: HUL is expected to maintain industry outperformance and likely beat
analyst estimates in the coming quarters, if the improved competitive dynamics
in key segments were to remain (our FY13 EPS estimate is 4% above consensus).
However, we believe minor earnings surprises are unlikely to impress the
markets, given CMP. Weakness in earnings, which could be precipitated by raw
material expenses (compounded by a weak rupee), could be a potential trigger
for negative earnings revisions/ de-rating of the stock. We also tend to think that
as uncertainty over ITC's near-term excise liabilities eases, HUL's valuations may
see some compression (likely March-April 2012).
q Risks: Upside risks include continued surprises in FY13/FY14 on A&P spends, and
declines in raw material prices. Downside risks to our estimates and price target
arise from likelihood of greater competitive intensity, especially in soaps and
detergents, and raw material and forex risks.
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