Hindustan Unilever Ltd. (HUL) reported a substantial net sales growth of 19.7% in Q3’08 on the back of a 6.8% growth in volume and a 13.1% improvement in pricing.
However, the EBITDA margin fell 38 bps yoy due to soaring raw material prices and a 14% increase in advertisement costs.
We expect HUL’s revenue growth to slow down in the coming quarters due to the steady loss in market share.
Following the aggressive entry by ITC and stiff competition from other FMCG players, HUL lost 1–2% market share in its mainstay, the Home & Personal Care (HPC) segment, during Q3’08.
Its market share in the Personal Wash, Hair, and Skin Care segments declined from 53.2%, 47.7%, and 55% in Q3’07 to 50.3%, 46.1%, and 52.7% in Q3’08, respectively. This trend, coupled with the worsening economic conditions, might restrict the Company’s pricing gains and volumes growth.
Therefore, we have downgraded our revenue growth estimates for FY09 and FY10 from 15% and 14% to 12.7% and 13.5%, respectively.
Soaring raw material prices, along with higher advertisement costs, adversely impacted the margins in the recent quarters.
Although commodity prices have fallen, we believe HUL will need to spend more on advertisements in order to boost volumes and restrict the loss in market share. Thus, we expect the EBITDA margin to improve to 15.4% in FY09 compared to 14.6% in FY08.
Our DCF-based valuation gives a fair value estimate of Rs248.51 for HUL’s share, which provides an upside of around 3.1% over the current market price of Rs240.85.
The company trades at a PE of 24.6x for FY09, a 37% premium over the sector average of 18x. After factoring all the positives, such as an ROE of 80%, wide distribution network, and the market leadership status in certain product categories, we believe that the stock is fairly valued.
As we do not expect any further upside from the current levels, we maintain our HOLD rating for the stock.