Hindustan Unilever share price rating 'Neutral', strong margin drives earnings, says Macquarie

Updated: Feb 3 2014, 18:30pm hrs
HulHindustan Unilever sales growth was 9% y-o-y, led by 7% and 12% growth in soaps and personal products business. PTI
Hindustan Unilever reported better than expected Q3 results and share price gets boost: PAT growth of 9% was 3% ahead of our expectation. Sales growth was 9% y-o-y, led by 7% and 12% growth in soaps and detergents (S&D) and personal products (PP) business, respectively. Volume growth of 4% was in line with our expectation. Maintain Neutral with a TP (target price) of Rs 650.

FMCG sales up 10% y-o-y: Hindustan Unilever reported volume growth of 4% in Q3FY14, which is the slowest growth since September 2009. The pricing component in sales growth has improved to 6% in Q3FY14 from 5% in Q2FY14 and 3% in Q1FY14 due to the price increase and mix change. Ebitda margin expanded 62bp y-o-y as 51bp increase in A&P (advertising and promotion) expenditure was offset by 71bp decline in raw material expense. Ebitda grew 13% y-o-y, 4% ahead of our estimate.

Soaps and detergent growth slows, margin expand: Growth improved to 7% y-o-y from 6% in Q2, primarily due to price increases and unwinding of promotions. Pears, Dove, Breeze and Lifebuoy led the growth in soaps. In laundry, Surf continued to grow strongly, while growth of Rin was led by bars. Growth in Wheel brand continued to be muted. Company relaunched the Wheel in December and the management expects the growth to improve.

Personal products grew 12%: Hair care grew strongly with double-digit volume growth. Dove led the segment growth, while Sunsilk, Clinic Plus and TRESemme grew well. In oral care, both brands grew in double digits, but the competitive intensity remained high. Skin care grew modestly. Lakme, Dove and facial cleansing portfolio grew well and Fair & Lovely relaunch has met the companys expectations. Colour Cosmetics continued to grow strongly.

Beveragesdouble digit growth in tea: Beverages sales grew 7% y-o-y, led by double digit growth in tea, which was offset by a slowdown in coffee sales. Beverages value growth has slowed due to declining commodity costs.

Price catalyst: 12-month price target of Rs 650. Catalyst will be any step up in volume growth. We remain positive on HULs medium-term growth potential. However, we believe rich valuation (31x FY15e PE) will limit the upside in the near-term.