Analyst Research Report Snapshot

Title:

Spark Capital: Hindustan Unilever 3QFY13 Result Review: Weakening volume growth, increase in Royalty to Parent - Downgrade to Reduce

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

24 Jan 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

HLL.NS

Available for Immediate Download
Summary:

Hindustan Unilever 3QFY13 Result Review: Weakening volume growth, increase in Royalty to Parent - Downgrade to Reduce Hindustan Unilever Ltd (HUL) results were below par as volumes remained weak for the second consecutive quarter. The like to like (adjusted for the hived off exports business) ~15% revenue growth was backed by 10% price/ mix improvement and a mere 5% volume growth (Lowest in three years). Personal product category revenue growth of 13% was a major disappointment as was the 102 bps yoy decline in soaps & detergents EBIT margins. The beverages category reported good growth and healthy margin expansion for the second consecutive quarter while processed food growth once again slumbered to single digits. EBITDA and net profit growth was substantially aided by higher other operating income and other income. Thus EBITDA and net profit grew 12.1% and 14.9% respectively. Key Takeaways from call with management and our views Volumes growth trajectory deteriorates: Despite the good work by HUL on innovation, relaunches, new product launches and strong advertising the volume growth rate dropped for second consecutive quarter (~7% in 2QFY13) from a trajectory of ~9-10. The management sights reasons of slowdown in discretionary spends by consumers, unfavorable impact from a 1Re increase in Fair & Lovely sachets and a high base of Dove shampoo sachets for the mediocre volume growth. A poor show on volume growth despite recovery in CSD sales indicates pain points on overall volume growth and especially in the Personal products segment. Increase in royalty to be a dampener: The company announced increase in royalty payment to Unilever parent from current 1.4% of turnover to 3.15% by FY18. The total estimated increase of 1.75% of turnover is set to happen in a phased manner. Impact on FY14 is to be 0.5% of the turnover, the increases thereafter to be in the range of 0.3% to 0.7% of turnover in each financial year until FY2018. The management cites this arrangement as fair increase for access to Unilever’s know how in terms of products, technologies and services as it shall help HUL better address the Indian market. However, we believe this increase in royalty shall substantially impact margins and as against our earlier expectations of EBITDA margin expansion, at best lead to flattening of EBITDA margins hereon. Increase in income tax rate to further impact profit growth: The effective income tax rate for HUL shall increase from 24.5% in FY13E to ~30-32% by FY15E as few of its manufacturing facilities having lower taxation shall be liable to higher /normal tax rates. This shall further limit the net profit growth over the next two years. Valuations and View: Our expectation of a lower volume growth trajectory of ~6-7%, EBITDA and PAT CAGR of a meager 14% and 10% FY13-15E respectively make us downgrade the stock to REDUCE from ADD earlier. We reduce our March’14 target price on the stock to Rs472 (25x FY15E from 29x earlier).

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