1. Buy rating on Hindustan Unilever; Not fretting over Patanjali yet

Buy rating on Hindustan Unilever; Not fretting over Patanjali yet

While near-term challenges remain for most consumer companies, the outlook is positive for HUL given its product portfolio and distribution reach

By: | Updated: December 14, 2015 1:26 AM

Hindustan Unilever (HUL) held a session recently regarding the company’s transition to the new Indian Accounting Standards (IND AS) and the preliminary impact on its financial statements. We also had a chance to interact with the management, the key takeaways of which are detailed below.

Competitive intensity never stabilises
* A large number of new entrants were noticed in the Soaps and Detergents (S&D) space last year after the input prices had declined. Though the company acknowledged this fact, it said that these small players (the term it uses to refer to them is ‘mushroom players’) keep coming and going and that it would not be losing too much sleep over the same.
* When asked about the newest player in the market, Patanjali, the management mentioned that the company has done well so far, but then it has launched a slew of products across categories and each new launch does see initial success. The test would be to sustain this growth consistently over a long period of time. We too feel that these are early days and the key challenge would be how it manages the breadth of the portfolio. Our historical analysis says that both breadth and depth are usually difficult to attain simultaneously.

HUL’s pricing strategy
* HUL’s pricing strategy is based on the prices of its input commodities as well as the behaviour of the competition around it. Essentially, in an ideal scenario, it would target a modest improvement in Ebitda margins driven by inflation-led pricing, stable volume growth and cost savings.
* Over the last quarter, the company took a price hike in half of its portfolio (Personal Products), while taking a price cut in the other half (Soaps & Detergents). This price cut was taken to ensure that it maintains relative competitiveness. These are the categories where the company is less sensitive to prices and prefers to choose volume growth due to innovation.
* Its recent price hikes in detergents were based on its brand positioning and strength, whereas its pricing strategy in its personal products portfolio is largely based on providing value to the consumer.

HUL’s focus areas
* The management believes that Central India is growing at a faster rate than the rest of the country, due to which the company has a heightened focus on the region with a full team based in Lucknow. It is looking at market development in this region.
* Apart from innovation, the company plans to use 20% of its funds for market development. Category wise, the company wants to explore dishwashing liquids and fabric conditioners in the home care space, conditioners in the hair care space, higher order benefits products in the skin care space and soups and premium ice cream in the food space.
* The company mentioned that there is a huge level of interest in natural products both in domestic and foreign markets, due to which there is a need for the company to strengthen this part of its portfolio. It is already working towards the resurrection of its brand ‘Ayush’ and more initiatives are under way.

Gr11

On Q3FY16
* The company mentioned that the recent floods in Tamil Nadu have been a disruption to its business, as a chunk of its demand comes from this region. However, it has ensured that it makes efforts to help alleviate the suffering and is providing whatever assistance it can.
* The company also admitted to winter being delayed this year, but is hopeful of the season starting soon. However, the company believes that it is somewhat resilient to these seasonal trends given the width and depth of its portfolio.

Going forward

* The company mentioned that it was too early for it to comment on the recent updates on the proposed GST or the 7th Pay Commission recommendations. However, overall, it views the implementation of GST to be positive for the industry as it will become a level playing field with less tax evasion and increase in efficiencies. If the final implementation is beneficial to the company, it will look to achieve a modest improvement in margins and then focus on market development with the funds.
* Regarding rural growth, the company admits that the pace of growth has slowed to the rate of urban growth, but the market is still growing. It equates rural consumers to consumers in tier-III cities, with most needs being aspirational.
* Regarding its portfolio in oral care, the management is still not satisfied with the performance of Pepsodent and is still working on improving the same.

Nomura’s view

Overall, we were satisfied with the management’s continued focus on premiumisation and its strategy towards its personal products portfolio. We continue to wait to see the corrective actions that the company takes in its oral care portfolio. While the near-term challenges remain for most consumer companies with a slowdown in consumption, we remain positive on HUL given its superior product portfolio, expansive distribution reach and management bandwidth. Maintain Buy with a TP (target price) of Rs 1,020.

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