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Monday, October 27, 2008

Hindustan Unilever (HLL) - Financial Results Analysis and Buy Recommendation

Hindustan Unilever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs225

Q3CY2008 results: First-cut analysis
Result highlights
The Q3CY2008 performance of Hindustan Unilever Ltd (HUL) is better than expectations. The net sales of the company are in line with our estimate whereas the operating profit margin (OPM) is above our estimate.
During the quarter, the net sales grew by 21.1% year on year (yoy) backed by a 6.8% volume growth in the domestic fast moving consumer goods (FMCG) business as well as a price led growth.
The home and personal care (HPC) segment (accounting for 74% of HUL’s total sales) registered a strong growth of 23.1% in sales to Rs3,035.9 crore. Within the HPC segment, the soap and detergent sales grew by 26% yoy to Rs1,986 crore driven primarily by price increases. The personal care business registered a sales growth of 18% yoy to Rs1,049.6 crore with a much higher growth in the volumes.
However, the profit margin was under pressure during the quarter and the same was expected in view of the raw material price escalation. Consequently, the profit before interest and tax (PBIT) margin of the HPC segment declined from 19.4% in Q3CY2007 to 17.3% for the quarter, with the margin in the soap and detergent business sliding by 315 basis points yoy to 13.5% and that in the personal care business dropping by 21 basis points yoy to 24.3%.
The sales of the food segment (contributing 16.2% of total sales) grew by 18.7% yoy to Rs662.7 crore with the sales of processed foods, ice creams and beverages increasing by 34.5%, 25.3% and 12.9% respectively. The overall PBIT margin of the foods portfolio declined by 56 basis points to 10.2%.
As a result, the OPM of HUL stood at 13.6% in Q3CY2008 against 14.1% in Q3CY2007. The drop in the margin is attributable to a higher raw material cost and an increase in the other expenses during the quarter. However, the advertising spends were kept under control and the same increased by only 14% yoy. As a result, the operating profit for the quarter grew by 16.5%. *
A 35.3% lower other income at Rs47.4 crore restricted the growth in the adjusted net profit to 12.2%.
An extraordinary gain (after tax of Rs87 crore) primarily on sale of properties led to a 34% jump in the reported profit to Rs546.6 crore.
We believe with the considerable softening in the prices of the key commodities (inputs for HUL) in recent weeks, the pressure on the margin of the company would ease in the coming quarters, thereby boosting the company’s profitability. At the current market price of Rs225 the stock trades at 20.3x its FY2010E earnings per share (EPS) of Rs11.1. We maintain our Buy recommendation on the stock. We shall follow this report with a detailed note after our interaction with the company. Keep visiting for more information on HLL and stock market related information.

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