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Hindustan Unilever ------------------------------------------------------ Maintain UNDERPERFORM
3Q11: weak results highlight large exposure to commoditised segments
● HUL’s 3Q11 results were well below estimates. Revenue growth
at 12% was in line, while margins at 14% were lower than
forecast. A sharp drop in the S&D segment margins (-570 bps
YoY) explains most of the miss in earnings.
● That HUL is growing faster than the market with double-digit
volume growth (13% in 3Q11) is encouraging. However, margin
contraction in S&D reflects the lack of pricing power in a
commoditised segment. With HUL’s large exposure to such
segments, the risk of margin disappointment is acute in an
inflationary environment.
● However, we note that with S&D margins at 7.7% (the lowest
ever), segment profitability may have reached its floor. Recent
price increases (4-5%) in the category could also mitigate cost
pressures to some extent.
● We cut our margin forecast by 70-76 bps for FY11-13E and raise
our estimates for other income and tax rates. Our FY11-13E EPS
declines by 1-3%, while the target price is unchanged at Rs197.
HUL’s 3Q11 results below estimates
HUL reported 3Q11 results well below estimates. Revenue growth at
12% YoY was in line, and was underpinned by volume growth of 13%
– the fourth consecutive quarter of double-digit growth. However,
margins at 14% were 220 bps below expectations, mainly driven by
lower margins in the soaps and detergents segment (-570 bps YoY).
Despite the high inflationary environment, the FMCG industry is
experiencing good growth with no signs of downtrading as of now.
With double-digit volume growth, HUL has been growing faster than
the market in the past few quarters.
Lack of pricing power in a commoditised segment
The sharp drop in S&D margins clearly reflects the lack of pricing
power in a commoditised and well-penetrated segment. Given HUL’s
large exposure to such segments – S&D forms about c. 40% of sales
– the risk of margin contraction is acute in an inflationary environment.
However, we note that at 7.7% EBIT margins (lowest-ever), segment
profitability seems to have bottomed. HUL has also taken price
increases (4-5%) in the category, which could mitigate cost pressures
to some extent in the coming quarters.
Changes to estimates
We raise our revenue forecast marginally, but cut our margin
estimates for FY11/13E by 70-76 bps. We also adjust other income
and tax rate assumptions. Our FY11E-13E EPS declines by 1-3%,
while our DCF-based target price remains unchanged at Rs197. We
maintain our UNDERPERFORM.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Hindustan Unilever ------------------------------------------------------ Maintain UNDERPERFORM
3Q11: weak results highlight large exposure to commoditised segments
● HUL’s 3Q11 results were well below estimates. Revenue growth
at 12% was in line, while margins at 14% were lower than
forecast. A sharp drop in the S&D segment margins (-570 bps
YoY) explains most of the miss in earnings.
● That HUL is growing faster than the market with double-digit
volume growth (13% in 3Q11) is encouraging. However, margin
contraction in S&D reflects the lack of pricing power in a
commoditised segment. With HUL’s large exposure to such
segments, the risk of margin disappointment is acute in an
inflationary environment.
● However, we note that with S&D margins at 7.7% (the lowest
ever), segment profitability may have reached its floor. Recent
price increases (4-5%) in the category could also mitigate cost
pressures to some extent.
● We cut our margin forecast by 70-76 bps for FY11-13E and raise
our estimates for other income and tax rates. Our FY11-13E EPS
declines by 1-3%, while the target price is unchanged at Rs197.
HUL’s 3Q11 results below estimates
HUL reported 3Q11 results well below estimates. Revenue growth at
12% YoY was in line, and was underpinned by volume growth of 13%
– the fourth consecutive quarter of double-digit growth. However,
margins at 14% were 220 bps below expectations, mainly driven by
lower margins in the soaps and detergents segment (-570 bps YoY).
experiencing good growth with no signs of downtrading as of now.
With double-digit volume growth, HUL has been growing faster than
the market in the past few quarters.
Lack of pricing power in a commoditised segment
The sharp drop in S&D margins clearly reflects the lack of pricing
power in a commoditised and well-penetrated segment. Given HUL’s
large exposure to such segments – S&D forms about c. 40% of sales
– the risk of margin contraction is acute in an inflationary environment.
However, we note that at 7.7% EBIT margins (lowest-ever), segment
profitability seems to have bottomed. HUL has also taken price
increases (4-5%) in the category, which could mitigate cost pressures
to some extent in the coming quarters.
Changes to estimates
We raise our revenue forecast marginally, but cut our margin
estimates for FY11/13E by 70-76 bps. We also adjust other income
and tax rate assumptions. Our FY11E-13E EPS declines by 1-3%,
while our DCF-based target price remains unchanged at Rs197. We
maintain our UNDERPERFORM.
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