Hindustan Unilever
Volume Woes, Downgrade To HOLD
HOLD
CMP: Rs 283 Target Price: Rs 290
In Q2FY10, Hindustan Unilever (HUL) reported (1) 4.6% yoy growth in its revenues to Rs42.8 bn, marginally below estimates (2) operating profit growth at 23.0% YoY to Rs6.6 bn – marginally ahead of estimate and (3) adjusted net profit grew 28.7% YoY to Rs5.6 bn – in line with estimate (assuming adjusted for tax shield). Growth in revenues was led by 8% growth in FMCG business (7% price-led growth and 1% volume-led growth), which in turn was driven by 13% growth in Personal Products business. Almost 50% of business i.e. Personal Products, Beverages and Processed Foods registered robust double digit volume growth and equally robust revenue growth. Whereas, 50% of business i.e. Soaps & Detergents continued to witness muted growth- with YoY decline in volumes.
Q2FY10 performance had no surprises – with operating performance marginally ahead of estimates and net profit performance in line with estimates. Further, expansion of gross margins and back-to-back increase in A&P spends is in consonance with our report 'Drawing Parallel'. HUL has taken corrective action to rejuvenate ailing brands and categories – through aggressive promotions, brand re-launch, corrective pricing and positioning- in pursuit of regaining the growth momentum. We would keenly watch the impact of corrective actions on the growth momentum and revisit our earnings estimates thereafter. Also, we draw your attention to the closing window of cost gains and the concurrent expansion in gross margins and robust earnings growth in ensuing quarter- owing to base- effects. Consequently, we maintain our FY10E and FY11E earning estimates at Rs10.9/Share and Rs12.1/Share respectively – but downgrade rating from 'ACCUMULATE' to 'HOLD' with price target of Rs290/Share – valuing at 24X FY11E earnings –which is 5-year average multiple.
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