All round disappointment - HUL’s 3QFY15 result update:: HDFC Securities

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--> All round disappointment
HUL’s 3QFY15 total operating revenues grew by 7.6%
YoY to Rs 77.7bn (below est), led by a paltry 3%
volume growth in the domestic consumer business.
Key disappointments were (1) anticipated pick-up in
demand further delayed as volumes grew merely 3%
YoY in domestic consumer business (vs 5% YoY in
2QFY15) (2) PP delivered 6.5% YoY sales growth (vs
9.9% YoY in 2QFY15) (3) EBIT margin declined for PP
(87bps YoY), Beverages (82bps YoY) and Packaged
foods (147bps YoY) and (4) EBIT loss surged 58.7% to
Rs 213mn in packaged foods.
We like HUL’s robust product pipeline, its strong and
lucrative personal products portfolio, and expanding
distribution network. Also, softening key RM prices
will further benefit gross margins in the coming
quarters. However, valuations seem to completely
ignore the emerging risks (1) no visible pick-up in
demand and (2) further increase in competitive
intensity due to RM softening. In addition, rural
wages grew by merely 3.8% YoY in Nov-14, the
slowest in 10 years, highlighting the imminent
pressure on rural sales. Downgrade to SELL with a TP
of Rs 800 (33x FY17E).
Volume growth remains under pressure
 In 3QFY15, total operating revenues grew by 7.6% YoY
to ~Rs 77.7bn. Domestic consumer sales grew by 8%
YoY led by 3% volume growth. The company cuts prices
across product portfolio to regain volumes.
 PP sales grew a mere 6.5% (due to subdued
performance in oral care) with 3.3% YoY EBIT growth.
S&D sales grew by 6% YoY (phase out of excise duty
benefits impacted growth) and margins expanded
69bps (aided by softening palm oil prices). Packaged
foods witnessed resilient sales growth (~12.6% YoY) but
EBIT loss surged 58.7% YoY to Rs 213mn. Beverages
posted a disappointing 8.2% sales growth; EBIT
increased by a mere 2.7% YoY.
EBITDA margin expands but much lower than est.
 Despite steep correction in key RM prices, EBITDA
margin expanded by a meager 14bps YoY to 17.1%
(below est of 17.9%). This was aided by lower COGS (-
117bps) and A&P (-30bps). This was partially offset by
higher staff costs (+87bps) and other exp (+ 46bps).
Valuations and view
 HUL is trading at 41.7/36.6x our FY16/FY17E EPS.
Downgrade to SELL with a TP of Rs 800 (33x FY17E).


LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010810