Fw: Investor's Eye: Pulse - Annual supplement to Foreign Trade Policy; Update - HUL (Shift in focus to maintain profitability)

 

 

Investor's Eye [August 25, 2010]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK  Annual supplement to the Foreign Trade Policy 2009-14 STOCK UPDATE  Hindustan Unilever Cluster: Apple Green Recommendation: Reduce Price target: Rs243 Current market price: Rs268 Shift in focus to maintain profitability  Price increases in the soaps portfolio: Hindustan Unilever Ltd (HUL) has implemented price hikes/grammage reductions in its soap portfolio to partially offset the high costs of inputs (especially palm oil and packaging). The company has hiked the price of Lifebuoy soap of 120gm stock keeping unit (SKU) to Rs16 from Rs15 earlier (that is a price increase of about 7%). It has also stopped the promotional offer on Lux soap by reducing the grammage from 110gm to 100gm, keeping the price unchanged at Rs18 (that is a price increase of 10%). Shift in focus to maintain profitability: The prices of palm oil and HDPE have shown an upward trend for the past two quarters. Hence, the receding benefit of a low-cost inventory along with higher spends towards advertisement and promotional activities (to improve market share in the key categories) will put intense pressure on the profitability of the company in the coming quarter. HUL?s margin slumped by 289 basis points year on year (yoy) to 12.5% in Q1FY2011 (on account of higher advertisement and promotional spends) and to prevent any further erosion in the margin the company has shifted its focus from improving sales volume/market share (in the key categories) to maintaining profitability.  Likely impact on sales volume and market share: The growth in HUL?s soap sales volume is recovering on the back of the pricing actions and promotional activities undertaken by the company. The soap sales volume of HUL grew at a lower single digit (while Godrej Consumer Products? soap sales volume declined by 9% yoy) in Q1FY2011. However, in the present competitive scenario where new entrants such as ITC have become aggressive to gain market share, the current price hikes of HUL would put pressure on the company?s soap sales volume and might also lead to a decline in its market share in the coming quarters.  Outlook and valuation: The buy-back price of Rs280 per share has lent support to the stock price allowing it to stay above Rs260 levels. However the weak business fundamentals of the company do not justify this price. Thus, in view of the subdued profitability growth in the coming quarters, we maintain our Reduce rating on the stock with a price target of Rs243. At the current market price the stock trades at 26.2x its FY2011E earnings per share (EPS) of Rs10.2 and 22x its FY2012E EPS of Rs12.2. Click here to read report: Investor's Eye Attention:  As per SEBI guidelines, clients who want to transact in the Futures & Options segment are required to submit proof of Financial Details. Kindly contact the nearest Sharekhan branch for more information or check the pop-up banner on our website, www.sharekhan.com.

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions

 

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