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Analyst Research Report Snapshot


Hindustan Unilever (HUVR) - Qtr. Update - Dated - October 26, 2012




Axis Capital Limited


27 Oct 2012





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Hindustan Unilever Ltd (HUL) reported 5th consecutive quarter of 20%+ profit growth, largely driven by margin pull back in Soaps and Detergents segment. However, domestic volume growth of 7% was the lowest since FY10 due to de-stocking at Canteen Store Department (CSD) and softer demand in certain discretionary categories. The impact of below consensus volume growth was offset by higher than expected margin improvement to 15.5%. Growth momentum could slip  Domestic FMCG business grew 16% YoY in Q2FY13, predominantly led by 22% growth in Soaps and Detergent (S&D) segment. With softening commodity costs, unfavorable base effect kicking in, and no further price hikes, we expect S&D to deliver normalized revenue growth of 14% in Q4FY13.  Key headwinds to watch out for are extent of slowdown in personal care segment and further rationalization of CSD sales. Overall revenue to grow 15% in FY14E vs. 17% in FY13E. Margin levers intact, but earnings upgrades unlikely  From a trough of 13.7% in FY11, EBITDA margin at 15.6% in FY13E would revert to its mean. This is similar to 7 years peak in FY10, just before the detergent price war. Thus, a significant position of margin surprise is behind us.  Increase in tax rate and lower growth in other income (post special dividend) is expected to dampen earnings growth to 12% in FY14E, despite 19% growth in operating earnings. Trades above fair value; Maintain SELL  Our discounted cash flow (DCF) based TP of Rs 490 implies 15% revenue CAGR and 180 bps margin expansion led by increase in revenue contribution from Personal Care and continuing premiumization trend.  As the stock trades 11% above our fair value, we believe much of the fundamental upside is captured. In fact, HUL’s 1-yr forward P/E (Oct-13) at 36x is similar to Nestlé’s valuation, which is unjustified, given Nestlé’s latent growth potential and strong pricing power. Maintain SELL.  At CMP of Rs 552, the stock trades at 37x FY13E EPS of Rs 14.9 and 33x FY14E EPS of Rs 16.6. Regards, Hemant B Patel (Executive Director – Consumer) Institutional Equity Research Axis Capital Ltd Tel: + 91 22 4325 1105 Ajay Thakur (AVP – Consumer) Institutional Equity Research Axis Capital Ltd Tel: + 91 22 4325 1125

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