Blackout period hits volume… • Hindustan Unilever :: ICICI Securities

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Blackout period hits volume…
• Hindustan Unilever (HUL) posted disappointing Q3FY15 results with
3% YoY volume growth. Net sales grew a moderate 7.7% mainly on
account of dismal volume growth and price cuts in the quarter post a
decline in commodity prices
• Revenue growth in soaps & detergent (S&D), personal products (PP),
beverages & foods was 6%, 6.5%, 8.2% and 12.6%, respectively
• Operating margins increased 10 bps to 17.1% as a 120 bps savings
in raw material cost was neutralised by an excise increase due to
expiry of tax holidays in some of the facilities
• Net profit increased 17.9% to | 1252.2 crore mainly on account of
one-time income of | 396.6 crore mainly consisting of property sale
Volume growth expected to remain low until FY15E
Being the country’s largest FMCG player, HUL’s volume growth has
decelerated in line with the economic downturn. Volume growth has
declined from ~13% (FY11) and ~9% (FY12) to ~4% in FY14. The
slowdown is largely on the back of a slowdown in urban discretionary
demand with rural growth remaining moderate. Going ahead, we believe
volume growth would remain muted until FY15E led by the slower revival
in GDP growth However, we believe that as the economy revives and
growth gains traction HUL’s strong portfolio of brands across segments
would aid the company’s volume growth to return to 6-7% annually.
Soaps, detergents to witness price led growth
S&D, HUL’s largest revenue contributing segment (~49% of sales in
FY14) witnessed a healthy CAGR of 13.4% in FY10-14 led by an equal mix
of volumes and prices. The pricing power of HUL is backed by the strong
leadership position of HUL in both segments (~40% of value share in
detergents and ~45% value share in soaps) and its presence across the
value pyramid in each of them. Going ahead, we believe that led by the
high penetration (~99%), volume growth in S&D would remain muted
while price growth is expected to be the key revenue growth driver
growing at 11.7% CAGR (FY14-17E) for the segment. We believe price led
growth would also be led by premiumisation in the segment with a revival
in urban demand in the economy.
Sustained healthy growth in personal product revenues soon
HUL’s PP (~29% of revenues, ~46% of PBIT in FY14) growth at 12.6%
CAGR (FY10-14) has been largely led by volumes following lower
penetration of oral, hair & skin care products in India and HUL’s
strengthening presence across these segments led by its strong brands,
Fair & Lovely, Ponds, Lakme, Clinic Plus, Close-Up, etc. However,
following the slowdown in discretionary demand, increasing competition
in PP segment and rejig in HUL’s largest PP brand (Fair & Lovely), its PP
sales have witnessed a slowdown since Q3FY13. Though sales growth
However, we believe, going ahead, HUL’s brand strength would revive
sales growth in the segment to 13.4% CAGR (FY14-17E) as consumer
demand gains traction.
Strong brands augur well for demand revival
We expect the near term slowdown to keep HUL’s growth moderate until
FY15 as it has taken price cut to pass on commodity benefit. However,
with a revival in urban demand and strong brands in growing aspirational
segments, we believe HUL is strongly placed to capture the booming
consumer demand. We value the stock at 36x FY17E EPS of | 24.8 and
arrive at a target price of | 902.

LINK
http://content.icicidirect.com/mailimages/IDirect_HUL_Q3FY15.pdf