The Hindu Business Line : HUL: Hold

Hindustan Unilever has unveiled good numbers for the December quarter with a strong recovery in sales growth, renewed traction in personal products and stable profit margins. The company has closed 2007 with a profit growth of 15 per cent, on a 13.5 per cent expansion in sales. While sales growth is picking up steam, this will have to trickle down to earnings if the current valuation for the stock is to be justified. At its current market price of Rs 206, the stock trades at about 23 times its trailing 12-month earnings and about 18 times its expected earnings for 2009. Fresh exposure can be avoided, but shareholders can continue to hold the stock.

Strong sales growth

After a lacklustre show in September, HUL’s December quarter numbers provided cause for cheer. Topline growth, at 16.8 per cent, accelerated to its highest level in two years. That this was driven by renewed momentum in HUL’s cash cows — soaps and detergents (18.3 per cent growth) and personal products (19 per cent) — is a big positive.

The personal product segment, which saw a poor show in the September quarter (due to the temporary closure of a key factory), appears to be back on track. However, growth this quarter may also have been magnified by exceptional factors such as an unusually long winter and delayed dispatches on account of the earlier disruption in output. The sustainability of this growth over the next few quarters needs to be watched.

Pricing power

That overall sales growth for HUL was made up, in equal parts, of volume and value growth is also a positive. If HUL manages to retain pricing power on its portfolio in the months ahead, it would be evidence of the strength of its brands and their dominant market shares.

FMCG players in “staple” categories such as soaps, detergents and personal care, have faced consumer resistance to price increases in recent months. With prices of inputs such as vegetable oils and petroleum derivatives in an inflationary mode, pressure on margins may continue in the coming months.

In this context, factors that may work in the company’s favour are the continued buoyancy in rural income and the lag effect of the good monsoon, which could drive sustained rural offtake for soaps, detergents, oral and hair care.

Margins maintained

While HUL’s sales growth for the quarter has outpaced many of its smaller rivals, its profit growth, at 14.6 per cent for the December quarter (shorn of exceptional items), lags many of its peers.

Going forward, new triggers for profit growth will have to come from nascent categories such as foods, payoffs from the company’s recent launches in the premium segments of hair and skin care and further price increases across brands.

HUL’s outlays on advertising and promotion have been aggressively ramped up over 2007. Hopefully, the heavy investment in brand-building will help HUL retain its pricing power, which has been instrumental in it maintaining profit margins this quarter.

With the inflationary spiral in agri-commodity prices likely to last for some time to come, pricing power will be the key to whether HUL maintains healthy operating margins of 19 per cent plus, in the year ahead.

Despite the mixed earnings picture, there are a couple factors that could limit downside risk to the HUL stock. The stock’s sharp under-performance (27 per cent gain versus the two-fold rise in Sensex over the past three years) has sharply whittled down its valuation premium to the overall market.

Healthy payouts and a recent stock buyback have bolstered the dividend yield on the stock to a reasonable 3 per cent.

Higher levels of risk aversion in the markets may also lead to premium valuations for stocks such as Hindustan Unilever.

More Stories on : Personal Products | Stocks | Recommendation | Hindustan Unilever Ltd

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
‘Towering’ logic to share telecom infrastructure

Tata Select Equity Fund: Hold

HSBC Equity: Invest

Dishman Pharma: Buy

REC: Invest at cut-off

HUL: Hold

Blue Star: Buy

IVRCL Infrastructures: BUY

Index Outlook

‘Indian equities not in a bear market yet’

What pricked the IPO bubble