Hindustan Unilever: No room for disappointment

Robust performance in previous quarter is expected to sustain in Q2 helped by double digit value growth rate in both soaps and detergents as well as personal care products

After ITC beat analysts’ estimates in September 2012 quarter (Q2), expectations of a superior financial performance from Hindustan Unilever (compared to ITC) have only increased. The company’s robust performance in the previous quarter is widely expected to sustain in Q2 helped by double digit value growth rate (in the range of 15-20 per cent) in both soaps and detergents as well as personal care products, continued strong rate of 8-9 per cent in overall volumes and pricing action (especially 10 per cent in detergents).

Financial estimates for Q2FY13
	Q2FY12	Q2FY13e	% chg
Sales (Rs cr)	5,522	6,254	13.3
Operating profit (Rs cr)	738	864	17.0
OPM (%)	13.4	13.8	44bps
Net profit (Rs cr)	645	764	18.6
NPM (%)	11.7	12.3	55bps
Source: Company, Analysts reports; bps = basis points

 

Based on various analysts reports, net sales is expected to growth 13.3 per cent to Rs 6,254 crore. Improvement in operating profit margin will be led by gross margin expansion (thanks to better product mix, price hikes and softening of palm oil and palm fatty acid prices) and flat advertising to sales ratio. Net profit at Rs 764 crore is likely to grow by 19 per cent which is being helped by stable tax rates.

After touching its life time high of Rs 579.6 on October 16, 2012, the stock’s valuation of 38 times FY13 estimated earnings is by no ways cheap. Hence market would not be able to digest any disappointment in Q2 though possibility of that is minimal. Downside risk exists from adjusted performance on account of de-merger of exports business (Rs 636 crore in FY12 or 3 per cent of overall standalone sales) and slowdown in some discretionary categories of foods and personal care products.

However, strong and aggressive innovation pipeline coupled with distribution and trade initiatives should correct the slowdown in few categories going ahead. Falling trend of major raw material prices is one more positive. Among the major raw materials, Palm oil and Palm fatty acid prices have declined 17 per cent and 26 per cent but LAB and soda ash is up 7 per cent 18 per cent in last one year.

According to Gautam Duggad, analyst, Motilal Oswal, price trend of palm oil and Palm Fatty acid is down, LAB is sideways while that for soda ash is up.