Hindustan Unilever - Slowdown in volume growth; concerns ahead - BRICS

HUL's results were below our estimates with - (1) revenue up 11.7% yoy to Rs66.5bn (2) operating profit up 12.2% yoy to Rs10.9bn and (3) APAT up 14.7% yoy to Rs8.8 bn. The growth of merely 5% yoy in domestic consumer volume was a disappointment. Also, HUL's plan to increase royalty will exert pressure on profitability ahead. Hence, we are lowering our EPS estimates for FY13 and FY14 from Rs15.3 and Rs17.1 to Rs15.1 and Rs16.0. Maintain Reduce with revised TP of Rs448.

Domestic business volume growth under pressure: Domestic consumer business revenue grew 14.9% yoy, driven by increase of 5% yoy in volume - lower than our estimate. This marked the lowest growth recorded by HUL in last 12 quarters, which can be attributed to increased competitive intensity in domestic market.

APAT below our estimate: Revenue grew 11.7% yoy to Rs66.5bn, while operating profit was up 12.2% yoy to Rs10.9bn. Operating margin remained flat at 16.4%, as a yoy decline of 100bps and 30bps in other expenses and RM costs was fully offset by a yoy increase of 80bps and 50bps in A&P spend and employee expenses. APAT jumped up by 14.7% yoy to Rs8.8 bn - below our estimate of Rs9.0 bn.

Margins decline in Soap and Detergent business: HUL's recent price hikes helped its soap and detergent business record a revenue growth of 19.8% yoy. However, increased investments in branding and cost pressures impacted its EBIT performance, with its EBIT margin down 100 bps yoy to 12.4%.

Margin improvement in Personal Products a surprise: After recording a revenue growth of merely 8.2% yoy in Q2, PP bounced back with a revenue growth of 13.0% yoy in Q3. Also, the segment's EBIT margin expanded by 140bps yoy to 28.3%, marking its first margin expansion in Q3 in the last four years, which came as a surprise.

Mixed performance in other businesses; disappointment in packaged foods continues: Beverages delivered a strong performance, with sales up 18.2% yoy to Rs7.9bn and EBIT up 33.5% yoy to Rs1.4bn. However, packaged foods continued to disappoint, with a growth of merely 7.7% yoy to Rs3.3bn and an EBIT loss of Rs26 mn in the quarter.

Lowering valuation multiple assigned to HUL, in view of higher risks attached to the stock: In light of the headwinds that could impact the company's performance in the coming quarters, we are lowering our target multiple from 29x to 28x - though it is still at a premium to its peer group. Consequently, we have arrived at our revised target price of Rs448. Maintain Reduce.

Source : Equity Bulls

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