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COMPANY UPDATE
Hindustan Unilever (HLL.BO)
Sell Equity Research
Several headwinds for sustaining high volume growth; Sell
What's changed
Hindustan Unilever (HLL) reported 3QFY12 sales of Rs58.5 bn (+16% yoy,
1% below our estimate). PAT of Rs7,538 mn was 6% above our estimate
due to lower-than-expected A&P spend. EBIT growth in personal products
decelerated sharply due to lower-than-expected margins and revenue
growth. Soaps & detergents operating profit margin expanded as less
intense competition permitted price hikes and a reduction in A&P spend.
Key takeaways from the conference call: 1) Oral care showed moderate
yoy growth; 2) negative pricing growth yoy in personal products, driven by
promotions; 3) reduced A&P spend in commodity-based categories like
soaps & detergents and beverages, but continued spend in personal
products and processed foods; and 4) continued emphasis in distribution.
Implications
We see headwinds for sustaining volume growth: 1) the latest Nielsen data
indicates FMCG growth of 10% yoy in 3QFY12 vs. 15% in 2QFY12.
However, management’s comments indicated stronger growth; 2)
competion remains high overall, with three of HUL’s largest competitors
willing to operate at low margins to gain market share; 3) a sustained cut
in A&P spends could result in a weakening market position for some
brands; and 4) high 4QFY11 base. Any softening in raw material prices will
likely be balanced by more intense competition, in our opinion.
Valuation
We retain our Sell rating and raise our 12-month target price to Rs304 from
Rs298, implying 20% downside from current levels. Our target price is
based on 22X FY13E EPS (unchanged). We raise our FY12-13E EPS by 2-
3% to account for lower advertising expenses. HUL is trading at 28X 1-yr
fwd EPS, which is more than 1-SD above its 10-yr average.
Key risks
(1) Less intense competion and sharp margin rebound in laundry segment;
(2) higher-than-expected volume growth led by up-trading.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
COMPANY UPDATE
Hindustan Unilever (HLL.BO)
Sell Equity Research
Several headwinds for sustaining high volume growth; Sell
What's changed
Hindustan Unilever (HLL) reported 3QFY12 sales of Rs58.5 bn (+16% yoy,
1% below our estimate). PAT of Rs7,538 mn was 6% above our estimate
due to lower-than-expected A&P spend. EBIT growth in personal products
decelerated sharply due to lower-than-expected margins and revenue
growth. Soaps & detergents operating profit margin expanded as less
intense competition permitted price hikes and a reduction in A&P spend.
Key takeaways from the conference call: 1) Oral care showed moderate
yoy growth; 2) negative pricing growth yoy in personal products, driven by
promotions; 3) reduced A&P spend in commodity-based categories like
soaps & detergents and beverages, but continued spend in personal
products and processed foods; and 4) continued emphasis in distribution.
Implications
We see headwinds for sustaining volume growth: 1) the latest Nielsen data
indicates FMCG growth of 10% yoy in 3QFY12 vs. 15% in 2QFY12.
However, management’s comments indicated stronger growth; 2)
competion remains high overall, with three of HUL’s largest competitors
willing to operate at low margins to gain market share; 3) a sustained cut
in A&P spends could result in a weakening market position for some
brands; and 4) high 4QFY11 base. Any softening in raw material prices will
likely be balanced by more intense competition, in our opinion.
Valuation
We retain our Sell rating and raise our 12-month target price to Rs304 from
Rs298, implying 20% downside from current levels. Our target price is
based on 22X FY13E EPS (unchanged). We raise our FY12-13E EPS by 2-
3% to account for lower advertising expenses. HUL is trading at 28X 1-yr
fwd EPS, which is more than 1-SD above its 10-yr average.
Key risks
(1) Less intense competion and sharp margin rebound in laundry segment;
(2) higher-than-expected volume growth led by up-trading.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
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