For Q2CY2008, Hindustan Unilever (HUL) continued its renewed growth momentum posting a healthy topline growth of 21.1% y-o-y (highest quarterly growth since 2002) to Rs4,216 crore (Rs3,481 crore), beating our expectation of 17.1% growth to Rs4,078 crore.
The growth was largely led by a strong 18.8% growth (volume growth of 8.3%) in the company’s core FMCG business backed by 20.7% growth in the soaps/detergents segment (aided by price hikes and market share gains in the Laundry segment) and 18.6% growth in personal products segment.
The Foods segment recorded a sluggish 12.1% y-o-y growth due to decline in sales of Salt and Atta brands.
For the quarter, HUL’s operating margins declined by 130bp to 13.1% resulting in muted EBITDA growth of 10% y-o-y to Rs551 crore (Rs501 crore). OPMs fell largely due to a 43bp rise in raw material costs and 75bp jump in advertising expenses. However, judicious price hikes coupled with buying efficiencies helped arrest further margin decline.
During CY2007-09, we expect HUL to report a CAGR growth of 14.7% in topline and
15.2% in bottomline (adjusted for exceptional items) backed by steady growth in its core brands, better pricing power and renewed aggression in terms of product launches.
At the operating front, we expect a CAGR growth of 15.3% in EBITDA supported by better product mix, improved productivity, judicious price hikes and scale-up in HUL’s water business.
However, input cost inflation and rising ad-spends (expected to sustain due to product launches and higher competition) are expected to keep margins under pressure.
At the current market price, the stock is trading at 22.1x CY2009E EPS of Rs10.8. We maintain ACCUMULATE rating, with a revised target price of Rs258 (Rs247).