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SECTOR: FMCG
Hindustan Unilever
STOCK INFO. BLOOMBERG
23 March 2010
BSE Sensex: 17,451 HUVR IN
REUTERS CODE
Neutral
S&P CNX: 5,225 HLL.BO Previous Recommendation: Neutral Rs228
Equity Shares (m) 2,177.5 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/
52-Week Range (Rs) 306/215 END (RS M) (RS M) (RS) GR. (%) (X) (X) (%) (%) SALES EBITDA
03/09A* 167,617 20,636 9.5 18.4 24.0 24.1 121.3 122.8 2.4 15.8
1,6,12 Rel. Perf. (%) -13/-17/-90
03/10E 175,683 20,256 9.3 -1.9 24.5 21.0 85.7 103.7 2.7 17.9
M.Cap. (Rs b) 495.8
03/11E 194,147 20,082 9.2 -0.9 24.7 19.2 77.7 95.2 2.5 17.7
M.Cap. (US$ b) 10.9 03/12E 217,112 23,590 10.8 17.5 21.0 17.7 84.2 104.5 2.2 15.0
* EPS for 12 months (April 08-March 09)
Realization de-growth may overshadow benefits of improving volume growth in near term
Pressure on realizations is likely to sustain in the near term; we believe volume growth and market share would take
priority, probably at the expense of profit growth. We note that HUL has been aggressive in taking price correction across
categories where market share pressure has been intense. While price cuts in detergents have been more pronounced,
HUL has improved the price value equation in Toilet Soaps, Dish Washing and Toothpaste. HUL has effected price cuts
of 11-17% in detergents, 7-17% in Toilet Soaps and 6.7% in Toothpaste (Pepsodent) in past three months. We are
factoring in 5% decline in detergents realizations for FY11 versus an estimated 9% YoY decline in detergent prices as of
now. We are factoring in flat realizations in soaps in FY11 versus an estimated 4% decline in soap realizations.
Downgrading FY10-12 estimates by 4-11%; our estimates are 10-19% lower than consensus
We are downgrading FY10-12 estimates by 4-11% to factor in lower realizations, input cost pressures (Palm Fatty Acid
Distillate prices are up 57% in past four months) and sustained high ad-spend (13.8% of sales in 3QFY10). We estimate
160bp decline in EBITDA margin in FY11 to 13.7% (earlier 15.3%) and 70bp increase in FY12 to 14.4% (15.7% earlier).
We are downgrading FY10 EPS estimates by 4.2% to Rs9.3 (Rs9.7 earlier), FY11 EPS by 10.6% to Rs9.2 (Rs10.3
earlier) and FY12 EPS by 10.7% to Rs10.8 (Rs12.1 earlier). We note that our estimates are lower than consensus by 10-
19% (despite recent downgrades by the street).
Competitive intensity to sustain; PAT CAGR of 8.3% over FY10-12; Re-iterate Neutral
We believe HUL is likely to face strong headwinds in the coming quarters as the combined effect of price based competition,
consumer downtrading, higher input costs, and media inflation gets reflected in financials. We believe that HUL is more
committed than ever to regain market share and invest in new categories for future growth although this will impair near
term profitability. Although the stock trades at trough valuations and discount to the FMCG sector (as against premium
of 10-25% historically), competitive price actions and market share trend in key categories would be key factors to watch
out for. The stock trades at 24.7x FY11E EPS of Rs9.2 and 21x F Y12E EPS of Rs10.8. We re-iterate Neutral.
We met the management of Hindustan Unilever to get an update on the rising competitive
intensity across product categories and the benefits of various market intervention strategies
undertaken in the past 2-3 quarters. Following are the key takeaways:
Volume growth is improving due to better consumer value proposition offered by HUL's
products. However, sales value growth would be lower than volume growth due to
price cuts in various product segments.
Detergent price war has been triggered by volume pressure in the mid-priced segment
due to consumer downtrading. P&G has launched Tide Naturals at lower price point
to prevent loss of consumers to economy segment (brands like Wheel, Ghari, Fena
and Nirma priced at Rs30/kg). HUL has re-launched Wheel Active (improved fragrance
and lemon extract); it does not expect price war to escalate to Surf Excel Blue and
Surf Excel Quick wash Segments.
Regaining lost market share in toilet soaps would be a function of bounce back in
Volume growth and market
regional brands like Hamam, Rexona, Liril and Breeze, as Lifebuoy and Lux on their
share is management
own cannot provide market share beyond 40% in a fragmented market like India. We
priority earnings to get
believe HUL's entire portfolio has to grow in sync to regain lost market share in toilet
impacted in the near term
soaps.
Cost of gaining incremental market share will be very high from now on; HUL will
increase spends on advertising, sales promotions and improving the consumer value
proposition to retain its market share. Ad spends of 11-12% of sales are history; ad
spends would not go below 13% in future (partly due to rising sales proportion of
personal care which has higher proportion of ad spends). HUL's ad spend had increased
by 66% to 13.8% of sales in 3QFY10.
HUL is nurturing new categories/brands for next leg of growth. These include
Deodorants (Axe, Dove, Rexona), Surface Cleaners (Cif and Domex), Hair
Conditioners (Sunsilk, Dove), Premium Skin care (Ponds, Vaseline), Savory (Knorr),
Ice Creams (Swirl Parlours) and Water (Pure IT). These categories would be
instrumental in changing the sales mix of the company in the medium to long term.
Price cuts in key categories facing market share pressure; realization de-
growth may overshadow benefits of improving volume growth
We note that HUL has been aggressive in taking price correction across categories where
market share pressure has been intense. While price cuts in detergents have been more
pronounced, HUL has improved the price value equation in Toilet Soaps, Dish Washing
and Toothpaste. HUL has affected price cuts of 11-17% in detergents, 7-17% in Toilet
Soaps and 6.7% in Toothpaste (Pepsodent) in past three months. We note that market
share in these categories have been under severe pressure over past 12 months. We
believe volume growth and market share would take priority in HUL, probably at the
expense of profit growth.
23 March 2010 2
Hindustan Unilever
PRICE CHANGES (RS) MAR'10 DEC'09 MAR'09 3M CHG. (%) 12M CHG. (%)
VALUE MARKET JUN-08 SEP-08 DEC-08 MAR-09 JUN-09 SEP-09 DEC-09 CHG. CHG.
Detergents 38.3 37.9 38.2 37.0 36.2 35.0 34.6 (370) (160)
Soaps 52.7 50.3 49.6 48.2 46.3 44.5 44.6 (810) (170)
Shampoo 46.5 46.1 46.0 44.9 45.4 45.2 44.8 (170) (60)
Toothpaste 30.0 29.6 29.1 28.0 28.0 27.1 26.1 (390) (190)
Tea 23.2 23.3 22.7 23.4 21.8 22.3 21.1 (210) (70)
Source: Company/MOSL
Tide Naturals launch has disturbed the delicate balance in Rs30-70/kg mass and mid
priced detergent segments. Nevertheless, our channel check suggest that Tide Naturals
had impacted sales of both Wheel (for consumers keen to up-trade at attractive price
point) and Rin (Lower pricing), although there has been some cannibalization of Tide's
sales. P&G has gone one step ahead with an aggressive 47% price cut in Tide detergent
cake. What followed in the form of the Rin-Tide Ad and the recent price cuts across
brands has re-aligned the competitive position in mass and mid priced detergent segment.
The premium of Tide Naturals to Wheel Active effectively stand reduced to 25% (8% in
certain states like UP, Bihar, MP and Chattisgarh), which we believe is too low for steady
growth of Wheel.
23 March 2010 3
Hindustan Unilever
We believe the intent of P&G to launch Tide Naturals at this price point extends beyond
market share in detergents. Tide Naturals launch is to increase presence in mass market
Tide naturals is competing and provide P&G's portfolio a platform to increase marketing reach (estimated reach
not only with Rin but also ~1m direct outlets v/s 2.5m of HUL and ~2-2.5m indirect outlets v/s 8m of HUL). We
Wheel brand of HUL believe the resulting distribution muscle is likely to be leveraged for new products (in
existing as well as new categories). P&G has target to add 1bn additional consumers
globally in the coming decade, much of the incremental consumers coming from India and
China.
Although HUL has re-launched Wheel as Wheel Active with new perfume, packaging
and advertising campaign (Salman Khan and Parachi Desai), it would impact the profit
margins in the medium term. In addition we don't rule out further price action from HUL
to protect market share and prevent P&G making from making inroads in the lucrative
rural consumer space.
Source: Company/MOSL
23 March 2010 4
Hindustan Unilever
USD/MT
595 105
Rs/Kg
550 90.1
90.0
510 90
450 85.1
PFAD prices have increased 350 75
312.5 67.8 71.1
57% in past four months 63.5
250 60
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jun-06
Jun-07
Jun-08
Jun-09
Sep-06
Sep-07
Sep-08
Sep-09
Dec-06
Dec-07
Dec-08
Dec-09
May-06
May-07
May-08
May-09
HDPE PRICES UP 45% YOY TEA PRICES UP 23% YOY
1,650
1,450 1,310
1,350 200
1,080
1,050 150
650 100
Jan-08
Jan-09
Jan-10
Sep-07
Sep-08
Sep-09
May-08
May-09
Jul-08
Feb-08
Feb-10
Jan-09
Jun-09
Mar-09
Sep-09
May-08
Nov-09
Oct-08
Source: Company/MOSL
In addition, we note that media inflation is likely to be in double digits as players across
sectors increase their ad-spend and focus on brand building. We have assumed 70bp
contraction in ad-spend (~4% value growth), with a likely downside risk.
23,000 14.0
16,000 12.0
9,000 10.0
2,000 8.0
CY03 CY04 CY05 CY06 CY07 FY09* FY10E FY11E
Source: Company/MOSL
23 March 2010 5
Hindustan Unilever
47.6 47.9
47.0 47.4 49.6 48.2
46.2
45.0
15.7
14.4
14.8 14.9 15.2 15.1
14.2 13.7
Source: Company/MOSL
Consensus Estimates 11.5 12.8 10.7 12.2 10.4 11.9 10.3 11.4
MOSL Estimates 10.6 11.7 10.2 11.4 9.7 10.4 9.3 9.2
% Variance -7.8 -8.6 -4.7 -6.6 -6.7 -12.6 -9.7 -19.3
Source: MOSL
23 March 2010 6
Hindustan Unilever
We maintain Neutral Although the stock trades at trough valuations and discount to the FMCG sector (as
against premium of 10-25%), competitive price actions and market share trend in key
categories would be key factors to watch out for. We believe competition this time around
is multi-pronged and it would require HUL considerable time and cost to return to mid-
teen profit growth. The stock trades at 24.7x FY11 EPS of Rs9.2 and 21xF Y12 EPS of
Rs10.8. We re-iterate our Neutral rating on HUL.
290 -25
260 -50
230 -75
200 -100
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
23 March 2010 7
Hindustan Unilever
23 March 2010 8
Hindustan Unilever
N O T E S
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Hindustan Unilever
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