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Spark Capital: Hindustan Unilever – 1QFY15 Outlook Review (Rating: Reduce; TP: 626)




Spark Capital Advisors(India) Private Limited


30 Jul 2014





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Hindustan Unilever – 1QFY15 Outlook Review (Rating: Reduce; TP: 626) How does our one year outlook change? Macroeconomic pressure to impact volumes – Hindustan Unilever (HUL) recorded ~6% volume growth led by healthy growth across several premium brands & categories. HUL categorically ruled out any down trading to popular/mass brands from premium brands, however they did acknowledge that consumers are shifting to LUPs in premium categories. Economic uncertainties as high inflation, threat of weak monsoon, lower rural budget allocation and discretionary spending slow down prolongs, which is expected to lead to subdued near term growth. Specific brands to drive growth: Soaps & Detergents performance should continue to tread well led by good growth across premium soap brands and Surf. Fair & Lovely re-launch and good traction in cosmetics & shampoo segments led to margins expanding ~270bps y-o-y to 27.6% in the Personal Products segment. However with increase in raw material costs and competitive intensity, sustaining such high margins could be challenging. Beverages portfolio also is beginning to show sustained performance with offtakes across Tea and Coffee remaining healthy. We understand - niche platforms as green tea are gaining prominence. Extended summer led to good offtakes in Processed Foods (PF) segment. Growth to however remain margin elusive in PF segment as excess A&P continues to be employed on educating the consumer on the product offerings. Views & Valuation: Despite a good quarterly performance, we believe valuations are stretched given the impending macroeconomic risk still looming around. We retain our Reduce rating with a TP of Rs.626 How does our 3 year Outlook change? Despite near term pressures emanating, we believe HUL continues to do what is right from a long term perspective. Potential of Indian consumer market remains an undeniable opportunity on the back of penetration and per-capita consumption prospects. Given that HUL holds a competitive edge by possessing leadership across several categories straddling brands across pricing pyramid making them the best placed to ride the Indian Consumption tide. However, the same strength also can be counted as a key challenge as HUL needs to do something path breaking/innovative to move back to high growth trajectory.

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