*Hindustan Unilever - Sharekhan* * *Recommendation: Reduce Price target: Rs540 Current market price: Rs589
*Margin surprise unsustainable; Reduce maintained* Result highlights - *Q2 reported earnings boosted by unexpected firming of margin; unfavourable demand environment and valuation makes us retain our Reduce rating: *Hindustan Unilever Ltd (HUL)'s Q2FY2014 results surprised positively with a higher than expected operating profit margin (OPM). The volume growth of 5% and revenues were largely in line with our expectations and were boosted by a double-digit growth in the personal care segment. However, the demand environment remains challenging and the sustainability of the margin is questionable given the lag effect on the raw material cost due to the depreciation of the rupee. We maintain our negative stance on the stock with a Reduce rating and price target of Rs540. - *Management commentary-moderation in demand; hedging and low inventory boost to margin: *The management in the conference call stated that the sales of discretionary categories are under pressure and the premiumisation trend in some of the key categories has scaled down in the recent past. Despite the rupee depreciating by ~10%, the gross profit margin (GPM) remained higher by above 169 basis points year on year (YoY) due to an efficient hedging mechanism and certain upholding of the low-cost inventory. The personal products segment has witnessed the revenue growth coming back to double digits, which can be attributed to the favourable base effect and higher sales of winter products during the quarter. - *Segmental performance shows mixed trend:* The commoditised soap and detergents segment registered a volume-led growth of 6% YoY with the profit before interest and tax (PBIT) margin remaining almost flat at 14.0% in Q2FY2014. The personal products segment regained its double-digit growth with the revenues growing by 12% YoY. The improved growth can be attributed to the low base of Q2FY2013 and higher sales of winter products during the quarter. The PBIT margin of the personal products segment declined by 141 basis points YoY to 22.8% during the quarter. The beverages segment continued to post a revenue growth of around mid- to high-teens (16% YoY for Q2FY2014). The lower tea and coffee prices aided the margin of the beverages segment to improve by 264 basis points YoY to 17.0%. The packaged food segment picked up some growth rate with a higher single-digit revenue growth of around 9% YoY. However, the growth in the packaged food segment has remained volatile for the past several quarters. - *Maintained Reduce rating on back of cautious outlook and premium valuation:* For the past four quarters, HUL's volume growth has been hovering around 5% and we expect the demand environment to remain challenging due to the sustained inflationary pressures hurting the discretionary spends and the intensifying competition in some of the key categories, such as soaps, detergents and oral care. On the other hand, the impact of the rupee's depreciation on the raw material cost, and the need for higher advertisement and promotional spends would put pressure on the margin in the coming quarters. We have broadly maintained our earning estimates for FY2014 and FY2015. Any significant deceleration in the GPM or drop in the sales volume growth in the coming quarters would act as a risk to our earning estimates. At the current market price, the stock trades at 36.4x its FY2014E and 32.6x its FY2015E. In view of the near term head winds and premium valuation, we maintained our Reduce rating on the stock with the price target of Rs540. -- CA. Rajesh Desai -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send email to [email protected]. Visit this group at http://groups.google.com/group/globalspeculators. For more options, visit https://groups.google.com/groups/opt_out.
