Motilal Oswal neutral on Hindustan Unilever

“Hindustan Unilever Ltd's (HUL) 2QFY13 results were broadly in line with estimates. Adj PAT of INR8.1b, up 23% (est INR7.8b), was led by strong 17% sales growth and 74bp YoY EBITDA margins expansion. Volumes grew 7% YoY (est 8-9%), a slight moderation from the recent trend of 8-10%. It was impacted by moderation in discretionary categories (premium skin care, processed foods, water) and continued weak trends in CSD, which contributes ~6% of HUL's revenues. CSD's adverse volume impact was 120bp for the company.”

“Sales grew 22.5%, while margins increased 190bp YoY to 14.3%. The segment EBIT growth of 41% YoY is driven by price hikes and operating leverage. HUL’s key laundry brands and peers took 20-25% price hikes in the past 12 months. We expect the impact of pricing component to fade, going forward. Surf and Rin registered double digit volume growth, Dove and Pears led to premiumization in skin cleansing, while Lifebuoy registered one of the strongest quarters. Company launched Comfort One Rinse during the quarter. Soaps and detergents’ competitive intensity increased sharply QoQ as shown in the GRP chart below. This is a reflection of rising local competition due to softening input costs. Management expects local competition to increase in the near term.”

“We do not expect S&D to sustain 20%+ revenue growth as the pricing element would fade, going forward. We note that media intensity in S&D has increased sharply QoQ (at the highest level in 15 quarters), and local competition is picking up driven by softening input costs. Hence, we do not assume further margin gains in S&D and maintain our estimates. While company’s 2QFY13 performance was slightly better than our estimate, the tepid PP numbers and continued sedate performance in processed foods and beverage pose a concern due to the premium valuation. The stock trades at 35.5x FY13E EPS and 30.6x FY14E EPS and has outperformed the Sensex by 15%. We maintain a neutral rating (on premium valuation), with a revised target price of INR540 (30x FY14 EPS). A slowdown in volume growth and increase in competitive intensity are the key risks,” says Motilal Oswal research report.

Shares held by Mutual Funds/UTI

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.