Hindustan Unilever
Margin Expansion
BUY
CMP: Rs226 Target Price: Rs276
In Q5FY09, HUL reported (1) 5.1% yoy growth in its revenues to Rs40.4 bn, below our estimates (2) operating profit growth at 22.9% yoy to Rs6.0 bn, ahead of estimates and (3) adjusted net profit increased 32.7% yoy to Rs5.0 bn, ahead of estimates. HUL disappointed on volume growth by reporting volume decline of 4.2%, but posted higher than expected price-led growth (16.7% yoy increase) - partially mitigating the impact from slow volume growth. A higher than expected benefits from decline in raw material expenses resulted in 210 bps yoy expansion in operating margins – posting positive surprise. Barring disappointment in Personal Products segment, performance in other segments was satisfactory during Q5FY09 – though price-led performance.
Our argument of margin expansion owing to fall in cost index has played out in Q5FY09 (though earlier than anticipated) with gross margin and operating margin expansion of 160 bps yoy and 210 bps yoy respectively. But, steep decline in volume at 4.2% yoy accompanied with loss of market share in key categories – has come to fore. We believe that, HUL is more likely to adopt competitive growth against profitable growth in ensuing quarters- posing risk to incremental margin expansion and earnings growth momentum. We have revised downwards our FY10E estimates by 6.8% from Rs11.7/Share to Rs10.9/Share and introduced FY11E estimates of Rs12.1/Share. We maintain our 'BUY' rating with revised price target of Rs276 – valuing on 1-year rolling forward basis.
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