>Hindustan Unilever Ltd. (FIRST GLOBAL)

REASONS FOR DOWNGRADE

• HUL delivered a disappointing performance in Q5 FY09, as a decline in sales volume of the company’s domestic FMCG business, as well as exports resulted in lower than expected revenues for the quarter

• The Personal Care segment, which was once HUL’s key growth driver, has been facing consumer downgrading due to the ongoing recession and lower discretionary income. The closure of 1000-1200 modern-trade retail outlets, including 800 outlets of Subhiksha, adversely impacted sales of the Personal Care segment in Q5 FY09

• Going forward, we expect consolidation in the retail industry due to the difficult macro economic environment to further impact the company’s sales, particularly in the Personal Care and Oral Care segments

• HUL’s exports continued to decline in Q5 FY09, as the company is exiting from the exports of non-core items. We expect a further decline in the company’s exports, as a result of lower demand on account of the economic slowdown

• Frequent price changes undertaken by HUL in the past has created growing uncertainty among wholesalers, who are de-stocking products in anticipation of further price cuts by the company, resulting in non-availability of products for consumers on the shelves of retailers.

The Story…
Hindustan Unilever Ltd. (HUVR.IN) (HLL.BO) delivered a disappointing performance in Q5 FY09, as a decline in sales volume of the company’s domestic FMCG business, as well as exports resulted in lower than expected revenues for the quarter. In Q5 FY09, HUL’s total revenues grew merely 5% Y-o-Y to Rs.40.5 bn, as against our estimate of Rs 43.9 bn, due to a decline of 4% Y-o-Y in sales volume of the domestic FMCG business and a decline of 44.7% Y-o-Y in exports. The decline in sales volume of the company’s FMCG business in the quarter was on account of down trading by consumers, the closure of 800 modern trade retail outlets of Subhiksha, and de-stocking by traders, while the decline in exports was due to management intentionally cutting down non-core exports. In Q5 FY09, HUL’s key growth driver, the Personal Care segment, was impacted by the closure of modern trade retail outlets, as a result of which, the segment’s revenues grew merely 1.9% Y-o-Y.

HUL’s Personal Care segment is losing market share in the skin care and oral care categories, while the Soap & Detergent segment continues to bear the burden of the company’s businesses, such as Processed foods, Ice Cream, Water Pure-It and Chemicals, which are still in the nascent stage and yet to break-even. The consolidation in the modern-retail industry and decline in the number of outlets due to the economic slowdown continues to impact the sales volume of some of HUL’s segments. We believe that the consumer down trading in low end products witnessed in Q5 FY09 will continue going forward as well, on account of the ongoing downturn and lower disposable incomes. We are, therefore, lowering our EPS estimate for FY10 from Rs.11.8 to Rs.10.5. On the valuation front, the stock currently trades at a P/E of 21.3x our CY09 EPS estimate of Rs.10.41 and EV/EBIDTA of 17.3x our CY09 estimates. We now downgrade HUL to ‘Market Perform.’

To see full report: HUL