[Investors Please Listen] Hindustan Unilever: Recommendation: Hold Price target: Rs271 Current market price: Rs277

Cluster: Apple Green

Q1FY2010 results: First-cut analysis

Result highlights

• Hindustan Unilever Ltd (HUL)'s Q1FY2010 results are ahead of our expectation at the operating level. However, a lower non-operational income and a lower operational income because of foreign exchange (forex) losses on marked-to-market forward contracts resulted in a lower than expected bottom line.
• In Q1FY2010 HUL's net sales grew by 7.8% to Rs4,475.7 crore (which is slightly below our expectation of Rs4,506.1 crore), driven by an 11.3% year-on-year (y-o-y) growth in the home and personal care business and an 18.2% y-o-y growth in the foods business.
• The actions taken by the company to get its volume growth back on track resulted in a 2% y-o-y volume growth as against a 4.2% y-o-y volume decline recorded in Q5FY2009 (the January-March 2009 quarter). However, we believe significant drivers of this growth were the grammage increases and promotional add-ons offered by the company during the quarter. 
• In Q1FY2010 the operating profit margin (OPM) improved by 209 basis points year on year (yoy) to 15.4% (ahead of our expectation of a 14.9% for the quarter). This was on the back of the softening prices of the key inputs which resulted in a 125-basis-point y-o-y drop in the raw material cost as a percentage of sales. Though the employee cost and the other expenditures reduced yoy, with a greater emphasis on volume growth the company increased its brand building and promotional activities, which resulted in a 25.8% y-o-y growth in the advertisement and promotional expenditure during the quarter. Thus, the operating profit grew by 24.8% yoy to Rs688.1 crore during the quarter. 
• The other income stood at Rs60.5 crore in Q1FY2010 as against Rs164.7 crore in Q1FY2009. The 67.9% y-o-y drop in the other operational income was on account of a forex loss of Rs31.8 crore against a forex gain of Rs24.8 crore in Q1FY2009 due to the marked-to-market valuation of the forward contracts. Also, the non-operational other income stood at just Rs33.54 crore in Q1FY2010 as against Rs80.78 crore during the corresponding quarter of the last year.
• With a lower other income and a higher tax incidence, the adjusted net profit stood flat at Rs537.2 crore in Q1FY2010 as against Rs543.7 crore in Q1FY2009 (below our expectation of Rs623.4 crore for the quarter).
• The post-tax extraordinary gains (includes profit on the sale of properties and investments) stood at Rs6.0 crore in Q1FY2010 as against Rs14.4 crore in Q1FY2009. Thus, the reported net profit declined by 2.7% yoy to Rs543.2 crore in Q1FY2010 from Rs558.2 crore in Q1FY2009.
• We will revisit our estimates and price target after the company's conference call tomorrow. At the current market price the stock trades at 25.4x its FY2010E of Rs10.9 and 22.5x its FY2011E of Rs12.3. We maintain our Hold recommendation on the stock.

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