UBS :: Hindustan Unilever - Competitive intensity to remain high

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UBS Investment Research
Hindustan Unilever
Competitive intensity to remain high
 
„ Event: Reduction in A&P spends and COGS
Hindustan Unilever (HUL) is up 17% in absolute terms from April’11 to date and
palm prices are down 9% in the same period. HUL cut down its advertising spend
in Q4FY11 from 9M average of 14.8% to 12.7% in Q4. Our media analyst Nupur
Agarwal from her coverage interaction suggests that FMCG companies are still
rationalising ad spend to maintain profitability post World Cup and IPL events.
„ Impact: increased earnings and price target
We have increased our FY12 & FY13 earnings estimates by 5% in order to reflect
the reduced COGS and A&P spend environment. We had built in ~11% volume
growth for HUL in FY12E which we are leaving  unchanged despite reduction in
ad spends.
„ Action: Reiterate Sell
We continue to be Sell rated on Hindustan Unilever as 1) we believe competitive
intensity will continue and 2) with reduced advertising spends HUL could lose
incremental sales and 3) the stock has built in expectations of high volume growth,
continued cuts in promotional spend will not possible given the competitive
environment and the stage of the market in India
„ Valuation –Raise price target to Rs275
We raise our price target from Rs250 to Rs275 to incorporate lower costs and A&P
spends. We derive our price target from a DCF based methodology and explicitly
forecast long term valuation drivers using UBS’s VCAM tool. We assume WACC
of 10.84%, a terminal growth rate of 2%, and beta of 0.55
Q 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.
Q 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.