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Hindustan Unilever (HUVR) - Qtr. Update - Dtd. - January 22, 2013




Axis Capital Limited


22 Jan 2013





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HUL reported weakest volume growth in 11 quarters at 5% YoY, well below our expectation of 8% YoY, as slowdown in discretionary segments and high price increase in low priced SKUs in select brands impacted demand. Faster growth in low margin S&D segment impacted margin mix resulting in lower than expected expansion in EBITDA margin (10 bps vs. 60 bps expected). Consequently, earnings growth of 15% YoY was slightly below our expectation of 18%. Fears of increase in royalty come true  HUL currently pays 1.4% (of net sales) as royalty, which is lower than royalty paid by most other listed regional subsidiaries of Unilever and listed MNC FMCG firms in India such as Nestle and Colgate. Hence we believe the increase in royalty payment was inevitable, but the timing may have surprised investors  HUL has agreed for a phased increase in royalty by 1.75ppt to 3.15% over FY14-18  While 0.5% p.a. increase in royalty charge could have an impact of ~3% on earnings, we believe the company will take pricing actions that could reduce the impact. Thus, we have reduced our earnings estimate by 1% for FY14. Personal Products (PP) slowdown impacts volume and mix Personal products yet again posted a sub-15% growth (up 13% YoY in Q3 vs. 12% growth in Q2). However, we believe this is just a mid-cycle slowdown and hence recovery is likely going forward (led by new launches and pick in demand environment). Hence we expect HUL’s overall volumes to grow by ~7% in FY14. Maintain HOLD with Mar ’14 TP of Rs 510 (6% upside)  As earnings momentum is likely to slow down (13% CAGR over FY13E-15E vs. 23% CAGR over FY11-13E) due to higher tax rate and increase in royalty payment, we believe HUL would find it difficult to sustain current premium valuation (29x 1-yr fwd) and PE multiple would seek a reasonable level in coming months. Hence we have valued HUL based on target P/E of 27x (3-year mean).  We roll over our valuation to FY15. Our Mar ’14 target price of Rs 510 (Rs 500 earlier) implies 6% upside from CMP of Rs 482. At CMP, the stock trades at 29x FY14E EPS of Rs 16.8 and 25x FY15E EPS of Rs 18.9. 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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