Friday, January 29, 2010

HUL operating profit growth of 5.8% yoy to Rs8.0 bn – in line with estimates

Hindustan Unilever

 

Facing CONUNDRUM, Maintain HOLD


HOLD

 

CMP: Rs 244                                  Target Price: Rs 276


The highlights of Hindustan Unilever (HUL) Q310 performance as under  - (1) 4.9% YoY growth in revenues to Rs42.8 bn – marginally below our estimates (2) operating profit growth of 5.8% yoy to Rs8.0 bn – in line with estimates and (3) adjusted net profit declined by 8.8% YoY Rs6.0 bn – below estimates. The 5% growth in volumes in Q310 was in line with our estimates - surprise to consensus expectations. Business segments like - Personal Products, Beverages and Processed Foods registered robust volume and value growth during the quarter. Soap and Detergent segment continued with muted performance owing to deflation- but experienced an improvement in volume growth.

During Q210 results – we had downgraded HUL from "ACCUMULATE' to 'HOLD' in lieu of (1) closing window of the cost gains and concurrent expansion in margins and (2) negative impact of corrective actions on the earnings growth for ensuing years. We reiterate our view that – Q410 onwards- risks and challenges will be higher in consumer sector. Even, HUL for that matter is likely to face 'CONUNDRUM' to maintain volumes or profitability. But, given the favorable base effects in volume growth for next two quarters, we have downgraded earnings by only 4% for FY10E and FY11E respectively. With HUL underperformance to broader indices for last 12 month and below average valuations of 21.3X FY11E earnings and discount to consumer peers like Dabur, Asian Paints and Colgate- we maintain HOLD rating with revised target price of Rs276/Share (Rs290 earlier).

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