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Analyst Research Report Snapshot


Hindustan Unilever (HUVR) - Co. Update - Dated - June 26, 2013




Axis Capital Limited


26 Jun 2013





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Key takeaways from our discussion with HUL management:  Intensifying growth deceleration, especially in discretionary  Local Body Taxes (LBT) issue in Maharashtra to impact Q1FY14 volume growth  Pace of premiumization has ebbed  Rising competitive intensity and demand moderation has led to increased promotions and trade offers in the last 6 months Volume growth to remain under pressure Industry growth deceleration had continued in April and May, which was more pronounced in discretionary categories such as skincare, packaged foods, fabric conditioners, and liquid soaps etc. Persistent high inflation along with slowing economy is impacting consumer demand. In fact, urban consumer (65% of FMCG market) has been more impacted than rural consumer due to high inflation, as per the management. We have modeled 6% volume growth in FY14 (vs. 10% volume CAGR over FY10-13). Price-led growth will be lower due to pricing corrections in soaps and detergents. Reduction in pace of premiumization; rising commodity cost on rupee depreciation Margin levers are clearly abating in near term. According to the management, pace of premiumization is slowing down and commodity costs have risen (Palm oil in INR up 16% from Jan 2013) alongside rupee depreciation. We have moderated our EBITDA margin expansion to 20 bps in FY14 (50 bps earlier), which reduces our EPS estimate by 2% each for FY14 and FY15. Correction post open offer likely; Maintain SELL Parent Unilever’s open offer to raise stake in HUL has led to 18% rise in stock price post announcement. The 1-yr fwd P/E valuation at 36x is higher than 1-standard deviation above mean and at peak in last 10 years. Decelerating earning momentum (8% CAGR over FY13-15E vs. 25% CAGR over FY10-13E) to compress P/E multiple post open offer. Maintain SELL with TP of Rs 504 (based on 28x FY15E EPS of Rs 18). At CMP of Rs 588, the stock trades at 37x FY14E EPS of Rs 15.8 and 33x FY15E EPS of Rs 18. Regards, Hemant B Patel (ED – 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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