1. Jefferies assigns ‘Hold’ rating to Hindustan Unilever as volume growth turns elusive

Jefferies assigns ‘Hold’ rating to Hindustan Unilever as volume growth turns elusive

Limited distribution expansion possibilities likely to result in muted volume growth; expect modest margin expansion over FY16-19e

By: | Published: November 1, 2016 6:35 AM

Volume decline of 1% was lower than our estimates of 2-3% volume growth while there was a miss on PAT. We remain concerned on excessive focus on margins and the lacklustre volume growth henceforth. We reduce our price target to R766.97, from R850 earlier and maintain a Hold rating on the stock.

Business update

Underlying volume decline of 1% following weaker sales growth in all the categories. Home care (4% growth): Surf witnessed strong volume-led growth; Vim liquid and Water business growth robust. Personal Care (1% decline): Price increases impacted the performance in Personal Wash. Pepsodent started recovering post relaunch, while Skin Care and Hair Care growth was led by premium brands. Recently acquired Indulekha brand was launched in 4 states. Refreshments (8% growth): All key brands grew well. Foods (2% growth): Rains and floods impacted sales growth; Knorr and Kissan brands continue to do well.

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Conference call takeaways

HUL has expressed confidence in the near term recovery of the market following good monsoons. All the categories are now witnessing price inflation, which should aid the top-line going ahead.

Volume growth to remain muted; modest improvement in margins

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HUL benefited from distribution expansion from 2010-13; however, distribution expansion possibilities in the near term are limited, which in turn would result in muted volume growth. Though HUL has increased margins in the past, we are building in a modest margin expansion.

Changes of estimates

Competitive intensity has increased in packaged foods and personal care category and we turn cautious on their growth potential in near term, resulting in a cut of c.5% on our FY19e EPS estimates.

Valuation/Risks

We value HUL using a DCF-based methodology, with a WACC of 10.4%, earnings CAGR of 11% from FY16-19e and 8.1% from FY20-29. A perpetual growth rate of 6% is assumed thereafter. We expect the stock to be range-bound and maintain a Hold rating. Risks: Demand weakness and an increase in competitive intensity can put pressure on our earnings estimates. Upside risk to our estimates would come from higher rate of premiumisation and increased salience of sales from the e-commerce channel, which is margin-accretive.

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