Hindustan Unilever - Weaker revenue growth; Sell - Anand Rathi

Of Hindustan Unilever (HUL)'s reported 11% revenue growth, seven percentage points came from volume growth. Personal care posted the lowest revenue growth of the past 14 quarters. Stable EBITDA margin but higher other income led to 25% yoy net profit growth. Ahead, since we expect brand-building expenses to rise, we retain a Sell, with a target of Rs.466.

- Weakest revenue growth in nine quarters. The 11% revenue growth (volumes contributing seven percentage points) was the weakest of the past nine quarters. Soaps & detergents posted 22.3% revenue growth; personal care 12.1%, beverages 10% and foods 10.2%. The growth in personal care was the lowest in the past 14 quarters.

- Stable EBITDA margin. Though there were savings in cost of goods sold, the 70-bp rise in ad-spend (as percent of net sales) resulted in the stable, 13.3% yoy, EBITDA margin. Segment-wise EBIT margins showed soaps & detergents expanding 191bps and beverages 90bps, while personal care and foods contracted 125bps and 471bps respectively.

- Higher other income drove net profit growth. Higher other income, resulting from the sale of non-current investments, climbed 83% yoy. The effective tax rate was a steady 24% yoy. Net profit was up 25% yoy. A special dividend (Rs.8) and first interim dividend (Rs.4.50) were declared.

- Outlook. Though HUL would benefit from the drop in palm oil prices, we expect that mounting competition from ITC, P&G and L'Oreal would compel HUL to increase brand-building measures. The slowdown in personal care products would result in lower profit margins ahead.

- Valuation. We value the stock at Rs.466, at a target PE of 27x FY14e earnings. Our target PE is at the mean PE of 27x for the past 10 years. Risk. Lower raw material prices.

Source : Equity Bulls

Keywords