>HINDUSTAN UNILEVER LIMITED (MORGAN STANLEY)

Quick Comment: We remain UW due to: 1) potential earnings growth volatility; 2) potential increase in competitive pressures from P&G; 3) potential rise in input cost pressures; and 4) potential slowdown in revenue growth. We spoke with management and here are the key takeaways from our conversation:

■ No conclusive slowdown in consumption: Contrary to the sharp slowdown reported by AC Nielsen for the industry for October-09 (from 14.8% in H1F2010 to 5.9% in Oct-09); there are no signs of a significant slowdown at the ground level. However, consumer downtrading in categories such as laundry continues and sharp price rises are also causing consumer downtrading in tea. Although there is no conclusive evidence of consumer demand slowdown yet, the company is closely monitoring the potential impact of high food inflation on FMCG consumption.

■ Soap brands relaunched, PP growth steady: HUL has relaunched all its soaps brands and has deployed its complete portfolio to improve its market share. Management is hopeful of improving market share and believes that the current signs may not be reflective of the potential underlying trend. Personal products segment growth remains steady for HUL, contrary to the slowdown demonstrated by the AC Nielsen retail off take data.

■ Ad spend likely to be under 12% in F2010: HUL’s ad spend to sales ratio was around 13% in H1F2010. However, H2F2010 ad spend to sales ratio is likely to be lower and hence the F2010 ratio is likely to be under 12%. However, during the six months ended Mar-09, HUL’s ad spend to sales ratio was 10%. Hence it is likely that the ad spend to sales ratio may witness an increase in H2F2010 yoy.

■ Tax rate likely to be at 23%: HUL’s tax rate in H1F2010 was around 23.2%, it is likely that F2010 tax rate will be in a similar range. The tax rate during the six months ended Mar-09 was around 20% and it is likely that HUL may witness 300 bps rise in the tax rate in H2F2010.

To read the full report: HUL