Hindustan Unilever Ltd (HUL)’s Q5FY2009 performance was below our expectation, as the volumes declined by 4.2% year-on-year (y-o-y) during the quarter.
However, the profit after tax (PAT) performance was in line with the expectation because the operating profit expanded more than our expectation.
For Q5FY2009 (January-March 2009 quarter), HUL’s net sales grew by 6% y-o-y to Rs3,988.3 crore, driven by price increases undertaken by the company over the period of 12 months. This is below our expectation of Rs4,305.6 crore for the quarter.
The sales volume fell by 4.2% y-o-y during the quarter, which disappointed us, as we were expecting a volume growth of ~2%.
The volume decline is a result of down trading of consumers to low-priced products; and HUL taking price corrections during the quarter that led to intermittent de-stocking in the distribution chain, which impacted the sales volume.
The operating profit margin (OPM) surged by 293 basis points to 13.8% during the quarter, mainly on account of decline in the raw material cost and other expenses.
The raw material cost as percentage to sales dropped by 290 basis points to 52.3% as against 55.2% in the corresponding quarter of the last year. This drop is attributable to sharp correction in the prices of some key inputs such as palm oil, LABfs and HDPE.
We have revised our top line estimates for FY2010 downward by 3.9% to Rs18,091.6 crore on account of an expected lower volume growth.
However, the expected expansion in the margins due to correction in the key raw material prices limits our downward revision in the bottom line to 0.9% to Rs2,380.6 crore for FY2010.
Though HUL’s management has taken corrective steps to address the key concern of decline in the volume growth, we believe, it would take some time before the positive impact of these steps on its overall performance becomes visible.
We expect the stock to underperform in the near-term. At the current market price, the stock trades at 20.7x its FY2010E earnings of Rs10.9 and 18.3x its FY2011E earnings of Rs12.3.
Given these concerns, we downgrade our recommendation to HOLD with a revised price target of Rs251 based on 23x its FY2010E earnings.