Hindustan Unilever – Returns to positive EBITDA growth ::RBS

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After four consecutive quarters of EBITDA declines, it has reported 8.6% growth. Volume growth
remained strong at 13%, driving revenues up by 14%. Input cost inflation remains an ongoing
challenge, but we believe HUVR's competitive position has improved with sustained innovation
and investment in brands.
Strong underlying performance in 4QFY11
􀀟 HUVR has delivered a revenue growth of 14% with its home & personal care business
growing at 13.6%. While the soaps and detergents business grew at 11.4%, the personal
products portfolio grew 16.2%. Innovation in skin care - FAL Anti Marks Eraser Pen, Lifebuoy
Health Talc and sustained growth in the Dive hair range helped strong growth. In the
detergents business, all its key brands - Surf, RIN and Wheel - delivered double-digit volume
growth.
􀀟 EBITDA growth at 8.6% was slightly lower than our expectations, but HUVR has clearly
returned to positive EBITDA growth after four quarters of EBITDA declines. Input cost inflation
driven by rising crude and palm oil prices has pushed the raw material cost to sales to 54.3%
from 51% in 3QFY11, however, 210bp fall in advertisement costs to net sales to 12.7% has
moderated the impact on EBITDA. We believe the fall in advertisement cost to net sales is
partly a reflection of the strong volume growth now for last five quarters, and stabilisation in
competitive intensity. HUVR's advertisement expenses to sales from 10.5% of net sales in
FY09 escalated to 13.6% in FY10, and further to 14.8% in first three quarters FY11, before
moderating to 12.7% in 4QFY11.
HUVR getting back to profitable growth
􀀟 Since the price war in detergents business with sharp corrections in brands like 'Rin' and
'Surf', HUVR has been passing through a phase of profit-less growth. Management focus was
entirely in maintaining and improving market share in an unblinking response to competition.
The EBIT margins in its soaps and detergents business has dropped from 14.3% in FY10 to
7.5% in 4QFY11. We believe these margins are unsustainably low and are bound to recover
but the easing in the commodity prices is crucial for the same.
􀀟 Personal products business of HUVR has delivered strong profitable growth through FY11
with revenue growth of 16% and a EBIT growth of 15.3%. The share of personal products in
overall EBIT of HUVR has risen to 55% in FY11 as compared to 46% in FY10. HUVR's
competitive position remains strong in categories like skin care, and in hair care and oral care
it has stabilised its market shares.
􀀟 HUVR recorded a EBITDA decline of 2% in FY11 driven by sharp fall in margins in its soaps
and detergents business to 9.5% compared to 14.3% in FY10. Given the recent price
corrections in the soaps business, and stabilisation in competitive intensity in the detergents
business, we believe, the worst period of EBITDA decline for HUVR could be behind us, and
expect the company to return back to profitable growth. We forecast an EPS CAGR of 14%
over the next two years driven by slight margin expansion, and revenue growth 11.5%.
We will review earnings after management contact, stay at Hold
􀀟 HUVR has delivered broadly in line performance in 4QFY11, and we believe the current
earnings of the company are depressed due to competitive pricing in detergents business and
high commodity prices. However, we see limited downside to its margins from these levels,
and hence expect earning growth broadly in line with revenue growth. The stock trades at
PER of 25-26x our current FY12 earnings and we will review our numbers post the
management interaction.
􀀟 We will review earnings after management contact, stay at Hold.