>Hindustan Unilever (EMKAY)

PRICING ACTION

HUL implemented price cut of 4%-20% on select brands and product categories. The price cuts are implemented either directly (20% price cut on Wheel Active Blue) or indirectly through weight changes (4.2% weight increase in Lifebuoy and 6.7% - 8.3% weight increase in Wheel Green). Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Recent price reductions ratify our call that consumer staple companies will retain some savings to improve margin profile and intensify advertisement activities and utilize the balance for price reductions to benefit consumers. The recent price reduction on select brands is in-line with expectation. Despite adjusting the above price actions, HUL can implement incremental price reductions of 3.1% without impacting FY10E earnings estimates and intensify advertisement activities. Our earnings forecasts for CY09E remain unchanged at Rs11.7/Share. We maintain our BUY rating with target price of Rs305.

HUL implemented price cuts of 4%-20% on select brands and product categories
HUL, w.e.f April 2009 implemented price cut of 4%-20% on select brands and product categories. The price cuts are implemented either directly (Wheel Active Blue – Cake) or indirectly through weight changes (Lifebuoy, Wheel Green – Powder). The pricing action undertaken are – (1) 20% price cut in Wheel Active Blue – Detergent Cake (200 gm) from Rs10 to Rs8 (2) 4.2% price cut in Lifebuoy by increasing the weight from 115 gm earlier to 120 gm and keeping the retail price unchanged at Rs15 and (3) price cuts in range of 6.7%-8.3% in two SKU of Wheel Green – Detergent Powder by increasing the weight from 275 gm to 300 gm and 560 gm to 600 gm.

Safety cushion still exists, despite the above price reductions
Drawing reference to our earlier report ‘Material Gains’, HUL is riding on net savings of Rs7,637 mn or additional margins of 4.3%. The report highlighted the magnitude of savings and re-iterated our call on partial retention of savings and partial pass through to the consumers. Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Despite adjusting the above price actions, HUL has enough safety cushions to introduce further pricing actions (upto 3.1% blended price reduction), make aggressive spends on advertisement and enough arsenal to combat price competition.

To see full report : HUL