Hold Hindustan Unilever; target of Rs 490: Emkay

“Hindustan Unilever (HUL), gradual makeover from a soaps and detergents (highly penetrated, low margin) company into a dominating personal product (less penetration, high margin) player is evident. We expect PP to contribute ~41% (from current 30%) in next 7 years and surpass S&D in terms of contribution to the net revenues. Thereby blended EBITDA margins can improve by 150-200bps (14.9% in FY12) in next 7 years. HUL’s constant focus to augment direct rural distribution, premiumisation, new product pipeline (strong parent portfolio), and customer centricity evident from strategies like ‘Bushfire’ and ‘Project PoPeye’ to benefit company over the long term.”

“HUL is not able to crack Indian palate. Many of its new launches (Kissan Soya Juice; Kissan Spread; MFD; Knorr Soupy Noodles: post initial success is facing headwinds) have not met with success that one associate with HUL. In contrast to parent Unilever’s ~50% sales from beverages, foods, and ice creams business, HUL derives ~18% of sales from the same. As per the company, there does not exist differentiated strategy/product in foods which enthuses the company (believes India is still nascent market for foods). Unlike other categories where HUL has always been the innovator; In Food’s it has been a follower (evident from HUL’s reluctance to create new categories). Thereby, food would take longer than expected to be a significant growth driver.”

“With unfavorable base effect kicking in and ‘NO’ further price hikes, value growth in S&D can moderate. As per our analysis, growth could normalize to 16-17% in laundry category and 10-12% in soaps category for remainder of the year. In near term, further risks could emerge to our assumption: 1) water business is facing severe headwinds (likely volume de-growth) due to tough macro environment 2) foods business, being more discretionary than other categories, could face the brunt of slowdown (also faced by Nestle, Agro Tech, GSK consumer) 3) momentum of premiumisation has slowed impacting more in PP category 4) tax rate to jump from current 24-25% by 200bps in FY13. It could move to marginal tax rate by FY15E,” says Emkay Global Financial Services research report.    

Non-Institutions holding more than 90% in Indian cos     

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