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HUL management has given a clear message in the 3QFY11 results that
protecting growth / market share takes precedence over protecting
margins. We believe that the strategy is in the long-term interests of
shareholders. However, in the interim, the margin impact would be
adverse and given the usual delay of 2 quarters between input price hike
and reflection of the same in P&L, worst is yet to come. We lower
earnings estimates by 5-9% and maintain U-PF on the stock.
3QFY11 ebitda dropped 13% YoY – 20% lower than estimates
Hindustan Unilever’s 3QFY11 Ebitda dropped 13% YoY driven by a 300bps
margin drop – largely attributable to an increase in RM costs (+216bps YoY)
and sustained advertisement and promotional (A&P) expenditure at the
higher level. Impact at the recurring PAT level was restricted to only -2% YoY
thanks to the near doubling of financial other income.
Raw material prices have hurt; but worst yet to come
Palm oil prices have risen by 38% over the last six months and 57% over the
last 3 months. We estimate that the full impact of raw material prices is
usually felt after 2 quarters due to the inventory and forward cover effect.
Consequently, while the company has taken a 2-3% weighted average price
hike in the soap portfolio in Jan’11, we believe that more is required just to
maintain margins at the current (7-8%) level. Additionally, crude based
chemicals (LAB and PET) have been firming up now and greater RM price
impact maybe felt in a quarter or two.
Sustained double digit volume growth a positive
13% volume growth (4th quarter in a row now) is a clear demonstration of the
company’s strategy of pursuing growth is working, though the acid test of the
same would be the Mar’11 quarter where the comparison will be with the
higher base for the first time. Most profitable (28% ebit margin) personal
products business growing by 20% is another positive from the results.
Stock should underperform
We expect the margin pressure to sustain for the next 3-4 quarters and
expect soap & detergent margins to reach double digits only by 4QFY12.
Consequently, we lower FY12 and FY13 estimates by 9% and 7% respectively.
12-m target remains unchanged as the benefit of rolling forward to Mar’13
gets negated by earnings downgrade. Potential lowering of palm oil / crude oil
will be a potential positive trigger for the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HUL management has given a clear message in the 3QFY11 results that
protecting growth / market share takes precedence over protecting
margins. We believe that the strategy is in the long-term interests of
shareholders. However, in the interim, the margin impact would be
adverse and given the usual delay of 2 quarters between input price hike
and reflection of the same in P&L, worst is yet to come. We lower
earnings estimates by 5-9% and maintain U-PF on the stock.
3QFY11 ebitda dropped 13% YoY – 20% lower than estimates
Hindustan Unilever’s 3QFY11 Ebitda dropped 13% YoY driven by a 300bps
margin drop – largely attributable to an increase in RM costs (+216bps YoY)
and sustained advertisement and promotional (A&P) expenditure at the
higher level. Impact at the recurring PAT level was restricted to only -2% YoY
thanks to the near doubling of financial other income.
Palm oil prices have risen by 38% over the last six months and 57% over the
last 3 months. We estimate that the full impact of raw material prices is
usually felt after 2 quarters due to the inventory and forward cover effect.
Consequently, while the company has taken a 2-3% weighted average price
hike in the soap portfolio in Jan’11, we believe that more is required just to
maintain margins at the current (7-8%) level. Additionally, crude based
chemicals (LAB and PET) have been firming up now and greater RM price
impact maybe felt in a quarter or two.
Sustained double digit volume growth a positive
13% volume growth (4th quarter in a row now) is a clear demonstration of the
company’s strategy of pursuing growth is working, though the acid test of the
same would be the Mar’11 quarter where the comparison will be with the
higher base for the first time. Most profitable (28% ebit margin) personal
products business growing by 20% is another positive from the results.
Stock should underperform
We expect the margin pressure to sustain for the next 3-4 quarters and
expect soap & detergent margins to reach double digits only by 4QFY12.
Consequently, we lower FY12 and FY13 estimates by 9% and 7% respectively.
12-m target remains unchanged as the benefit of rolling forward to Mar’13
gets negated by earnings downgrade. Potential lowering of palm oil / crude oil
will be a potential positive trigger for the stock.
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