Hindustan Unilever rating 'neutral, In slow-moving mode: IDFC

Jan 06 2014, 09:00 IST
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Sedate near-to-medium-term outlook makes the stock pricey Sedate near-to-medium-term outlook makes the stock pricey
SummarySedate near-to-medium-term outlook makes the stock pricey

We recently interacted with the senior management of Hindustan Unilever (HUL) and other industry players. Key takeaways:

Volume growth to moderate further: Initial trends in Q3FY14 indicate a further sluggishness for the fast moving consumer goods industry. Growth rates have been lower across markets and categories, with slack rural growth as well. HUL too has not remained untouched by the same. In fact, a delayed winter has hit HUL’s skin care sales, for which Q3 is the most significant quarter. HUL has maintained an average volume growth of 5% in the last four quarters; we expect volume growth to be lower in Q3 and factor in a 3% volume increase in our estimates for the quarter.

HUL

Competitive intensity sustaining at higher levels: In Q2FY14, the industry’s media spends were the highest in the last 12 quarters with a sharp increase in oral care. There has been no let-up in media intensity in Q3; oral care spends continue to be at the higher end. However, HUL has rationalised some of the promotions in laundry to pass on a portion of the cost inflation. Overall, A&P spends (as percentage of sales) are unlikely to come off in Q3 on q-o-q (quarter on quarter) basis and will be higher on a year-on-year basis. We expect overall A&P (advertising and sales promotion) spends to reduce gradually for the industry as, in an environment of high inflation and low pricing power, cost rationalisation will likely involve an A&P cut.

Soaps & detergents–revenue growth to remain moderate: In the last one year, soaps have been the key volume driver for HUL with the segment recording consistent double digit volume growth. Detergents too have seen healthy volume growth, across Surf Rin though Wheel, to lag. With overall category growth moderating, volume growth in soaps & detergents has declined; however, with a large part of promotions in soaps and a portion of the promotions in detergents being reduced, the segment could revert to price-driven growth Q3 onwards. Hence, though overall revenue growth in the segment will be in high single digits, it will not entirely be volume-driven—as has been the case in the last couple of quarters. Though Ebit (earnings before interest and taxes) margins are likely to be lower sequentially due to the impact of rupee depreciation on the cost index, a low base (12.4% Ebit margins in

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