Neither fair nor lovely

Jan 28 2013, 02:29 IST
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SummaryHindustan Unileverís volume growth, which has halved in the last four quarters and is the lowest for the last three years, is indicative of the increasing pain points in the existing portfolio.

Royalty overhang, moderation in profit growth outlook to tell on valuations

Hindustan Unileverís volume growth, which has halved in the last four quarters and is the lowest for the last three years, is indicative of the increasing pain points in the existing portfolio. To add to this, the new product pipeline is capped to ďUnileverĒ categories which prevent ĎIndianisationí. We believe this will result in the innovation funnel drying up, thereby making it harder for HUL to achieve relevant volume growth in the long term.

Further, the royalty increase restricts any benefits of margin expansion that the company would enjoy in the coming years and in the process suppress profitability. We believe lack of incremental growth drivers in the product portfolio, the royalty overhang and moderated profit growth outlook will take its toll on valuations. We downgrade HUL to Ďunderperformí with a target price of R442.

The pressure is evident: We believe the pain points emerging in the core portfolio will keep volume growth at mid-single digits in the coming quarters and HUL will have to focus on expanding its innovation funnel to compensate for the same.

Fair and Lovely, HULís largest skin care brand constituting around 4% of the companyís sales, has been witnessing pressure on the increase in sachet pricing. Our sense is the brand has witnessed a volume de-growth during the quarter, the sachets de-growing by double digits in volume. Our sense is the company will take some time before it can revive growth in this important brand and till then growth in personal products will be subdued.

Wheel, HULís mass detergent brand has been impacted by a number of factors, including competition by regional players, up trading by consumers as well as higher inventory stocking. Our sense is the brand has lost 50-60 basis points (bps) market share in the last one year. However, HUL has not lost aggregate market share in this segment.

Discretionary categories like premium skin care, face wash etc that have been central to the strong volume growth performance over the last few quarters, have started to slow down. Further, the foods portfolio continues to be drag on the business.

Unileverisation restricting the innovation funnel: The companyís alignment to the Unilever portfolio implies that it would not participate in any category that the parent does not have a presence in. We note that of its $12-billion brands globally, eight are already present in India and with the exception of

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