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UBS Investment Research
Hindustan Unilever
Raw material pressure and competition to hurt profits
�� Downgrade to Sell
We downgrade HUL to a Sell (from Buy), given management’s focus on acquiring
market share at a cost, which could be detrimental to minority shareholder interest.
HUL’s management is focussed on volume growth despite commodity cost
pressures, in our view. This is the key reason for our Sell recommendation.
�� RM Index is stretched; price increases slow to come through
We have constructed a RM index for HUL; which is up 35% YoY in the last 3
months. We estimate the weighted average price increase taken is ~5-6% for its
basket which leaves us with a 650bpts gap in gross margins to be bridged through
mix adjustments, market action and indirect cost rationalization. We estimate
HUL’s margin to compress at least ~80bpts in FY12E.
�� Earnings downgraded, PT downgraded
We are reducing our FY12/13E EPS estimates to Rs10.79/12.16 from
Rs12.26/14.15 to incorporate higher COGS and A&P spends. Consequently we are
reducing our price target to Rs250 from Rs320 previously.
�� Valuation
We derive the price target from a DCF-based methodology and explicitly forecast
long term valuation drivers using UBS’s VCAM tool. Our price target is equivalent
to 23.2x our 2012 EPS estimate.
Downgrade to Sell
We downgrade HUL to a Sell from Buy, given management’s focus on
acquiring market share at a cost which we believe could be detrimental to
minority shareholder interest. HUL’s management is focussed on volume
growth despite commodity cost pressures, in our view. This is the key reason for
our Sell recommendation.
HUL’s Raw material Index
We have created a raw material index for HUL, assigning weights based on the
usage of each of each of these raw materials by HUL. The index has gone up by
35% YoY in the period Jan-Mar’2011.
Earnings changes
We are reducing our EPS estimates to Rs10.79/12.16 for FY12/13E from
Rs12.26/14.15. We are also reducing our price target from Rs320 to Rs250 due
to incorporate 1) increase in COGS, 2) decrease in long-term growth
assumptions due to increased competition.
�� 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
Raw material pressure and competition to hurt profits
�� Downgrade to Sell
We downgrade HUL to a Sell (from Buy), given management’s focus on acquiring
market share at a cost, which could be detrimental to minority shareholder interest.
HUL’s management is focussed on volume growth despite commodity cost
pressures, in our view. This is the key reason for our Sell recommendation.
�� RM Index is stretched; price increases slow to come through
We have constructed a RM index for HUL; which is up 35% YoY in the last 3
months. We estimate the weighted average price increase taken is ~5-6% for its
basket which leaves us with a 650bpts gap in gross margins to be bridged through
mix adjustments, market action and indirect cost rationalization. We estimate
HUL’s margin to compress at least ~80bpts in FY12E.
We are reducing our FY12/13E EPS estimates to Rs10.79/12.16 from
Rs12.26/14.15 to incorporate higher COGS and A&P spends. Consequently we are
reducing our price target to Rs250 from Rs320 previously.
�� Valuation
We derive the price target from a DCF-based methodology and explicitly forecast
long term valuation drivers using UBS’s VCAM tool. Our price target is equivalent
to 23.2x our 2012 EPS estimate.
Downgrade to Sell
We downgrade HUL to a Sell from Buy, given management’s focus on
acquiring market share at a cost which we believe could be detrimental to
minority shareholder interest. HUL’s management is focussed on volume
growth despite commodity cost pressures, in our view. This is the key reason for
our Sell recommendation.
HUL’s Raw material Index
We have created a raw material index for HUL, assigning weights based on the
usage of each of each of these raw materials by HUL. The index has gone up by
35% YoY in the period Jan-Mar’2011.
Earnings changes
We are reducing our EPS estimates to Rs10.79/12.16 for FY12/13E from
Rs12.26/14.15. We are also reducing our price target from Rs320 to Rs250 due
to incorporate 1) increase in COGS, 2) decrease in long-term growth
assumptions due to increased competition.
�� 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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