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UBS Investment Research
Hindustan Unilever
Q3 FY11 review
Volume growth +13%, PAT declines 5% YoY
Hindustan Unilever’s (HUL) volumes grew 13% (UBS-e +12%) aided by trade and
consumer promotions and low-base quarter comparison (growth of 5% in Q3
FY10). Revenues grew +11.6% YoY, underlying soaps and detergents (S&D) grew
+5.8%, and personal products (PP) grew +20.2%.
Profitability down; aggressive market expansion spends
The EBIT margin on S&D is down from 13.4% in Q3 FY10 to 7.7% in Q3 FY11,
we believe due to pricing cuts affecting realisations, while higher inputs affected
RM cost. PP margins have been relatively unaffected at 28.8% versus 31.9% in Q3
FY10. EBITDA declined 13% and PAT (pre-ex) declined 5% YoY. ASP spends
were at 14.8% of sales, down from 15.7% (highest ever) in Q1 FY11, but higher
QoQ from 13.8% in Q2. We believe price increases should selectively help
maintain GM, and ASP spends should moderate going forward.
Share gains have been expensive
HUL has guided for aggressive market spends, above and below the line to gain
share. While we do not have AC Nielsen estimates on shares, competition and onthe-
ground marketing staff highlight there have been share gains across HUL’s
categories.
Valuation: maintain Buy
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool.
Hindustan Unilever
Hindustan Lever is the leading household goods and food products company in
the country. It has a dominant share in each of its key businesses: personal care,
laundry, tea and branded staple foods. An unmatched distribution reach covering
directly over a million retailers and a wide product portfolio with pricecompetitive
products underpin its market leadership. Management is focusing on
rationalising its brand portfolio to drive a sales growth rebound and has
identified 30 core brands to which it will commit maximum resources for
growth.
Statement of Risk
We think the key risks that could affect the sector include continued upward
movement of downstream petrochemical products and higher agri-commodity
based raw material costs, and the inability of branded consumer companies to
pass on price increases in an increasingly competitive market. The sector has
low corporate tax rates because factories are located in areas that are designated
as tax benefit zones; any change in this law could affect earnings, in our view.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Hindustan Unilever
Q3 FY11 review
Volume growth +13%, PAT declines 5% YoY
Hindustan Unilever’s (HUL) volumes grew 13% (UBS-e +12%) aided by trade and
consumer promotions and low-base quarter comparison (growth of 5% in Q3
FY10). Revenues grew +11.6% YoY, underlying soaps and detergents (S&D) grew
+5.8%, and personal products (PP) grew +20.2%.
Profitability down; aggressive market expansion spends
The EBIT margin on S&D is down from 13.4% in Q3 FY10 to 7.7% in Q3 FY11,
we believe due to pricing cuts affecting realisations, while higher inputs affected
RM cost. PP margins have been relatively unaffected at 28.8% versus 31.9% in Q3
FY10. EBITDA declined 13% and PAT (pre-ex) declined 5% YoY. ASP spends
were at 14.8% of sales, down from 15.7% (highest ever) in Q1 FY11, but higher
QoQ from 13.8% in Q2. We believe price increases should selectively help
maintain GM, and ASP spends should moderate going forward.
Share gains have been expensive
HUL has guided for aggressive market spends, above and below the line to gain
share. While we do not have AC Nielsen estimates on shares, competition and onthe-
ground marketing staff highlight there have been share gains across HUL’s
categories.
Valuation: maintain Buy
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool.
Hindustan Unilever
Hindustan Lever is the leading household goods and food products company in
the country. It has a dominant share in each of its key businesses: personal care,
laundry, tea and branded staple foods. An unmatched distribution reach covering
directly over a million retailers and a wide product portfolio with pricecompetitive
products underpin its market leadership. Management is focusing on
rationalising its brand portfolio to drive a sales growth rebound and has
identified 30 core brands to which it will commit maximum resources for
growth.
Statement of Risk
We think the key risks that could affect the sector include continued upward
movement of downstream petrochemical products and higher agri-commodity
based raw material costs, and the inability of branded consumer companies to
pass on price increases in an increasingly competitive market. The sector has
low corporate tax rates because factories are located in areas that are designated
as tax benefit zones; any change in this law could affect earnings, in our view.
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