Analyst Research Report Snapshot

Title:

Spark Capital: Hindustan Unilever 4QFY13 Result Review - Volumes remain weak; maintain Reduce

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

30 Apr 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

HLL.NS

Available for Immediate Download
Summary:

Volumes remain weak; maintain Reduce Hindustan Unilever (HUL) volumes remained weak for the third consecutive quarter . Net revenue growth of 12% had underlying volume growth of just 5.5% (adjusting for the increase in primary sales off take due to potential transport strike). Despite double digit volume growth in key brands in soaps and detergents (S&D) overall volume growth was weak primarily due to weak volumes in personal product (PP) portfolio. Benign commodity cost scenario enabled overall gross margins expanding by 106 bps yoy to 46.9%. EBITDA and net profit grew 16.6% & 17.4% on gross margin expansion and higher other income. The PP segment disappointed on profitability as well with margins contracting 213bps yoy on high A&P. Key Takeaways from call with management and our views Volume outlook remains bleak: Management guided that weakening consumer sentiment and corresponding impact on discretionary spending is continuing to impact volume growth. While improved value proposition in S&D sales due to pass on of benefits from benign commodity costs has helped sustain reasonable volume growth, the personal product sales growth has been significantly impacted. Skin care category continued to post weak sales numbers especially at the mass end of skin lightening products under Fair and Lovely. While beverages segment showed good sales growth and profitability in 4Q, packaged foods continued to disappoint with a mere 7% sales growth. With increasing pressure on incomes we see HUL’s overall volume growth to be low at ~7% in FY14. Benign raw material costs to aid gross margins, higher royalty and tax rate to hurt though: Lower palm oil (down 32% yoy) and prices of crude derivatives assisted in gross margin expansion this quarter. Key raw materials continue to be on the down-trend which we believe despite pass on of some benefit to consumers should assist in better gross margin in FY14. However high competitive intensity across categories and efforts to boost sales growth should lead to higher spends on branding. Also, Increase in royalty payments should further limit gross margin benefits translating into any EBITDA margin gains. We thus expect a CAGR of 13.7% in EBITDA over FY13-15E , further as the effective tax rate shall increase from 24.4% in FY13 to ~30% by FY15E we expect the net profit CAGR to be a mere 11%. Valuations and View: Our expectation of a low volume growth going ahead coupled with a mere 11% earnings CAGR over FY13-15E we do not see any upside on HUL’s stock price. Trading at 28.7x FY14E EPS and 26.1x FY15E EPS we find the stock overpriced. We maintain a reduce rating on the stock with a target price of Rs. 477 (25x FY15E EPS).

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