Hold Hindustan Unilever; target of Rs 359: Emkay

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Hold Hindustan Unilever; target of Rs 359: Emkay

Emkay Global Financial Services has recommended hold rating on Hindustan Unilever (HUL) with a target of Rs 359, in its February 7, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on Hindustan Unilever (HUL) with a target of Rs 359, in its February 7, 2012 research report.

"Hindustan Unilever (HUL), personal products performance yielded negative surprise on all counts. The revenue growth moderated to 14.0% yoy to Rs18.9 bn, slowest in last 8 quarters. Though, categories like Skin Care, Hair Care and Skin Cleansing recorded double digit growth alongside premiumization, only oral care witnessed weak performance. This alongside higher Promotional spends in few categories has impacted the segment profitability. The Ebit growth was mere 2.4% yoy to Rs4.9 bn and Ebit margins declined 290 bps yoy. It also attributed to exceptionally high margins in Q3FY11. In YTD FY12, A&P spends have decline by 7.7% yoy to Rs21.4 bn. Further, it has declined 300 bps yoy from 14.5% of revenues in 9MFY11 to 11.5% of revenues in 9MFY12. It is largely attributed to low competitive intensity in Soaps & Detergents and lowest GRP achieved in Q3FY12. With our expectation of moderation in growth momentum for Consumer sector in ensuing quarter, GRP could have bottomed and competitive intensity could strengthen curtailing incremental A&P leverage."

"Despite performance being ahead of expectation, we reckon the quality of performance of Q3FY12 remains extremely weak. The key observation is (1) Q3FY12 performance is driven by Soaps & Detergents, which has confluence of positive events like benign competition alongside strong growth for organized players; this could have attained cyclical peak and (2) mainstay business of Personal Products has reported moderation in growth momentum with competitive activities increasing in Skin Care and inability of HUL to crack the oral care category. We reiterate that all levers have played out for HUL in terms of (1) competitive intensity in Soaps & Detergents business at lowest (2) best ability to undertake pricing actions in current scenario (3) gains from A&P leverage due to lower GRP in Soaps & Detergents and (4) delivering fairly strong volume growth rate. Thus, we strongly believe that cyclical gains have peaked out and so has the earnings upgrades peaked out. Also, we continue to hold our reservations on sustained growth in Consumer sector amidst expectation of falling farm incomes and divergence in income growth and high inflation."

"We did not foresee further tailwinds in HUL's business operations from either volume or margin catalysts. And rightly so, HUL has turned into Underperformer since the delivery of Q2FY12 performance. We had downgraded our recommendation in Q2FY12; continue to maintain negative bias. Moreover, at the CMP of Rs 380 and valuations of 28x FY13E EPS, we believe potential upsides are capped. Hence, while we realign earnings estimates, we retain Negative bias with HOLD rating and target price of Rs359/Share (earlier price target of Rs347/Share)," says Emkay Global Financial Services research report. 

Institutional holding more than 40% in Indian cos

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