>HINDUSTAN UNILEVER LIMITED (JM FINANCIAL)

■ Building a steadier tomorrow for itself: The cover page of HUL’s 2002 annual report read: “We do not inherit the world from our ancestors. We borrow it from our children”. We are keen to believe that HUL’s laundry price adjustments (c.12% cut in Surf, c.25% in Rin) and all other initiatives to offer ‘better consumer value’ reflect steps towards building a steadier future for itself. 4-5%-pts market share losses in laundry/soaps over past 12 months coupled with prolonged period of sub-peers growth rate highlighted that HUL’s stance of aggressive price hikes and margin-consciousness (we suspect some of this was even at the cost of product quality) weren’t really the most optimum strategies in a fiercely competitive market place. Given its distribution muscle, a right price-cum-quality value mix is perhaps a good first-step to help HUL address the issues. In our end-Dec’09 management meeting, HUL’s CFO had indicated that the company remains committed to participating in the huge growth opportunity in the Indian
market, even if (hypothetically) it brings with it the need to lower its operating margin-profile from the current level. Refer our report “CFO meeting notes: portfolio, premiumisation & profitability” dated 23 Dec 09 for details

8-10% earnings and TP cut; will there be light?

.
■ Near-term earning weakness imminent; cutting FY11-12E EPS by 8-10%: While HUL’s aggressive ‘competitive growth’ strategy appears to be the right step, near-term earning weakness is imminent. As per our workings, the pricecuts are likely to result in 5-6% cumulative drop in laundry realization over FY10- 11E and a 225-250bps compression in soaps & detergents segment gross margin. We estimate Surf and Rin’s share in HUL’s laundry revenue to be 30-35% and 15-20% respectively. Note that the cumulative drop in laundry realization over 2003-04 (P&G price war) was c.6%. We have, however, cushioned some margin impact by building in moderation in A&P growth going forward as: (a) HUL has already hiked spends aggressively in FY10, (b) Lower prices may gradually replace A&P. We are also assuming that HUL’s cost savings plan will continue to yield results.

■ Reducing target price to Rs253; continue to prefer ITC for a premium growth profile: We have lowered our FY11-12E EPS by 8-10% based on the effected price adjustments (P&G yet to react but is quite likely to), ‘equalization’ of prices of other Surf and Rin SKUs and building in slight cut in Wheel as well. Our revised EPS estimates for FY10-12E are Rs10.0, Rs10.6 and Rs12.2. We continue to prefer ITC on account of its premium growth profile. Refer our note on ITC “Portfolio power: multiple drivers of growth” dated 25 Jan 10 for details.

To read the full report: HUL