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HINDUSTAN UNILEVER
Maintain CONTRA view; 13% volume growth translates to market share gains
Volume growth beats estimate; robust growth in high margin PP
Hindustan Unilever’s (HUL) Q3FY11 revenue jumped 11.6% Y-o-Y to INR 50.27
bn. Accelerated volume growth of 13% was better than our 11% estimate.
Personal Products (PP), which posted ~65% EBIT in Q3FY11 and offers best-inclass
gross margins, grew a sturdy 20.2% Y-o-Y.
Market share gain in most of the categories
The company’s aggression on field has been recognized by competitors who have
reduced promotional spending, taken price hikes, and lost market share. Our
channel checks suggest that HUL has gained share in many segments where it
was losing earlier—180bps in fabric, 54bps in washing powder, 362bps in
detergent cakes, 120bps in toilet soaps, 29bps in toothpaste, 70bps in packaged
tea, 62bps in instant coffee (all data in volume terms in Dec 2010 compared to
Dec 2009). This is ample proof of the fact that the company’s execution is on
track. Losers were Henkel, Fena and Nirma (in fabric, washing powder and
detergent cakes), Nirma (in soaps) and Anchor and Ajanta (in toothpaste).
Higher COGS and A&P dent margins; price hikes to offset inflation
The company’s EBITDA declined 13.1% to INR 6.24 bn, while margins declined
353bps. Gross margin declined (like all other FMCG companies) on high base in
Q3FY10. A&P costs were up 73bps Y-o-Y, as full Diwali impact was featured in
Q3 this year, vs. Q2 in FY10. In Q3FY11, the company raised the price of a 1kg
Rin pack from INR 50 to INR 54 (~8% increase). In January, it raised the price
of the Lux 90g pack from INR 16 to INR 17 (~6.25% increase); prices of Dove
have been increased to INR 36 from INR 35 earlier (~3% increase) and those of
Pears have been increased from INR 40 per pack to INR 42 (5% increase).
Outlook and valuations: Positive; maintain ‘BUY’
We are confident of HUL’s underlying business turnaround and prudent cost
control. HUL will increase focus on judicious price hikes as current margins in
Soaps & Detergents are unsustainable. We expect A&P expenses to moderate
going forward following high base, lower pace of innovation and ~90% of recent
re-launches. Stock has underperformed the FMCG pack recently, though gross
margins concerns were not unique to HUL and, we believe, share buy-back till
July 2011 will prevent further downside. We maintain ‘BUY’ recommendation on
the stock. On relative return basis, the stock is rated ‘Sector Performer’.
HUL now plans to increase prices to offset rising raw material costs, which it says cannot
be managed by cost efficiencies alone.
In Q3FY11, the company raised the price of a 1kg Rin pack from INR 50 to INR 54 (~8%
increase). In January, it raised the price of the Lux 90g pack from INR 16 to INR 17
(~6.25% increase). Prices of Dove have been increased to INR 36 from INR 35 earlier
(~3% increase) and those of Pears have been increased from INR 40 per pack to INR 42
(5% increase). HUL may follow it up with ~5-8 % hike in fairness cream Fair & Lovely in
February.
HUL offered discounts in several brands for the Republic day sale period, which will
exhaust most of the existing stock. Products with the new price tag should hit the
market by February.
The country’s second-largest soap maker Godrej Consumer Products, maker of Cinthol
and Godrej No 1 brands, too plans a increase prices to deal with soaring raw material
costs, while Wipro Consumer Care, maker of Santoor soap, will wait a bit before taking a
decision.
Company Description
HUL, the largest FMCG Company in India, was formed by merging three subsidiaries of
Unilever in 1956. At present, Unilever Plc holds a 52% stake in the company. HUL’s
portfolio of products covers a wide spectrum including soaps, detergents, skin creams,
shampoos, toothpastes, tea, coffee, and branded atta.
Powerful brands and an envious distribution network are HUL’s primary strengths. The
company operates through five segments—soaps & detergents, personal products,
beverages, foods, and ice creams—exports, and other operations.
Investment Theme
HUL is a play on consumption growth in India. The company has displayed its ability to
effect price hikes and avoid impact of inflation in vegetable oils, which, combined with
improved outlook for fabric wash and strong growth in processed foods and beverages,
boosts our positive outlook on the stock. The recent moves by the company to dispose of
its non core assets including few properties give it a near term upside. We believe the
price war in the detergent segment with rival P&G has ended and this is likely to add to
the profitability from the segment going forward.
Key Risks
A rise in crude oil prices can result in biodiesel demand resurfacing, which in turn could
lead to increase in vegetable oil price inflation; in turn deteriorating the company’s
operating margins.
The price war in HUL’s popular segments with new entrants entering the fray could hit
the company hard.
Further risks arise from down trending by consumers in response to recent price hikes,
which could hurt the company’s top line.
A substantial part HUL’s turnover is derived from the rural market. Deficient rainfall
could impact agricultural activity which in turn could hit rural demand.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HINDUSTAN UNILEVER
Maintain CONTRA view; 13% volume growth translates to market share gains
Volume growth beats estimate; robust growth in high margin PP
Hindustan Unilever’s (HUL) Q3FY11 revenue jumped 11.6% Y-o-Y to INR 50.27
bn. Accelerated volume growth of 13% was better than our 11% estimate.
Personal Products (PP), which posted ~65% EBIT in Q3FY11 and offers best-inclass
gross margins, grew a sturdy 20.2% Y-o-Y.
Market share gain in most of the categories
The company’s aggression on field has been recognized by competitors who have
reduced promotional spending, taken price hikes, and lost market share. Our
channel checks suggest that HUL has gained share in many segments where it
was losing earlier—180bps in fabric, 54bps in washing powder, 362bps in
detergent cakes, 120bps in toilet soaps, 29bps in toothpaste, 70bps in packaged
tea, 62bps in instant coffee (all data in volume terms in Dec 2010 compared to
Dec 2009). This is ample proof of the fact that the company’s execution is on
track. Losers were Henkel, Fena and Nirma (in fabric, washing powder and
detergent cakes), Nirma (in soaps) and Anchor and Ajanta (in toothpaste).
Higher COGS and A&P dent margins; price hikes to offset inflation
The company’s EBITDA declined 13.1% to INR 6.24 bn, while margins declined
353bps. Gross margin declined (like all other FMCG companies) on high base in
Q3FY10. A&P costs were up 73bps Y-o-Y, as full Diwali impact was featured in
Q3 this year, vs. Q2 in FY10. In Q3FY11, the company raised the price of a 1kg
Rin pack from INR 50 to INR 54 (~8% increase). In January, it raised the price
of the Lux 90g pack from INR 16 to INR 17 (~6.25% increase); prices of Dove
have been increased to INR 36 from INR 35 earlier (~3% increase) and those of
Pears have been increased from INR 40 per pack to INR 42 (5% increase).
Outlook and valuations: Positive; maintain ‘BUY’
We are confident of HUL’s underlying business turnaround and prudent cost
control. HUL will increase focus on judicious price hikes as current margins in
Soaps & Detergents are unsustainable. We expect A&P expenses to moderate
going forward following high base, lower pace of innovation and ~90% of recent
re-launches. Stock has underperformed the FMCG pack recently, though gross
margins concerns were not unique to HUL and, we believe, share buy-back till
July 2011 will prevent further downside. We maintain ‘BUY’ recommendation on
the stock. On relative return basis, the stock is rated ‘Sector Performer’.
HUL now plans to increase prices to offset rising raw material costs, which it says cannot
be managed by cost efficiencies alone.
In Q3FY11, the company raised the price of a 1kg Rin pack from INR 50 to INR 54 (~8%
increase). In January, it raised the price of the Lux 90g pack from INR 16 to INR 17
(~6.25% increase). Prices of Dove have been increased to INR 36 from INR 35 earlier
(~3% increase) and those of Pears have been increased from INR 40 per pack to INR 42
(5% increase). HUL may follow it up with ~5-8 % hike in fairness cream Fair & Lovely in
February.
HUL offered discounts in several brands for the Republic day sale period, which will
exhaust most of the existing stock. Products with the new price tag should hit the
market by February.
The country’s second-largest soap maker Godrej Consumer Products, maker of Cinthol
and Godrej No 1 brands, too plans a increase prices to deal with soaring raw material
costs, while Wipro Consumer Care, maker of Santoor soap, will wait a bit before taking a
decision.
Company Description
HUL, the largest FMCG Company in India, was formed by merging three subsidiaries of
Unilever in 1956. At present, Unilever Plc holds a 52% stake in the company. HUL’s
portfolio of products covers a wide spectrum including soaps, detergents, skin creams,
shampoos, toothpastes, tea, coffee, and branded atta.
Powerful brands and an envious distribution network are HUL’s primary strengths. The
company operates through five segments—soaps & detergents, personal products,
beverages, foods, and ice creams—exports, and other operations.
Investment Theme
HUL is a play on consumption growth in India. The company has displayed its ability to
effect price hikes and avoid impact of inflation in vegetable oils, which, combined with
improved outlook for fabric wash and strong growth in processed foods and beverages,
boosts our positive outlook on the stock. The recent moves by the company to dispose of
its non core assets including few properties give it a near term upside. We believe the
price war in the detergent segment with rival P&G has ended and this is likely to add to
the profitability from the segment going forward.
Key Risks
A rise in crude oil prices can result in biodiesel demand resurfacing, which in turn could
lead to increase in vegetable oil price inflation; in turn deteriorating the company’s
operating margins.
The price war in HUL’s popular segments with new entrants entering the fray could hit
the company hard.
Further risks arise from down trending by consumers in response to recent price hikes,
which could hurt the company’s top line.
A substantial part HUL’s turnover is derived from the rural market. Deficient rainfall
could impact agricultural activity which in turn could hit rural demand.
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