As was anticipated by us, Hindustan Unilever Ltd (HUL) has started passing on the benefits of the declining raw material prices and the savings on account of the reduction in the excise duty recently announced by the government in a stimulus package.
The company reduced the prices and increased the grammage in select stock keeping units (SKUs) towards the end of January 2009.
HUL’s overall volume growth rate has shown a declining trend in the past few quarters, which is a cause for concern.
The volume growth has declined because of the relentless price increases effected by the company in the past few quarters to protect its margins.
The price increases/grammage reductions were particularly steep in the soaps and detergents category (which contributes ~47% of HUL’s sales and 44% of its overall profits).
As a result of the downtrading / grammage reductions and the rationalization of consumption by consumers, HUL’s detergent volume growth has tapered steeply and soap sales have registered a year-on-year decline in volumes in the past few quarters. Also, the market share in the soaps category has been under pressure.
In contrast, HUL’s competitor, Godrej Consumer Products (with brands such as Godrej No.1 and Cinthol), has registered a robust volume growth in the same period as it has shied away from aggressive price increases.
This shows the shift of consumers to lower price points in response to the sharp rise in the prices of HUL’s products.
Thus, we believe HUL’s latest move is aimed at boosting its volumes in these categories and the steep decline in the prices of the key raw materials, such as palm oil, LAB and HDPE, is supporting this move.
We believe that in FY2010 HUL’s top line growth will be lower and largely volume driven, as we expect the company to rationalize prices further to address the volume concerns.
Thus, the bottom line growth will be largely driven by the expansion in the profit margin as a result of the lower raw material cost (whose benefits are expected to kick in from the quarter ending March 2009).
Though the risk of consumers slowing down their spending has increased significantly of late, we expect discretionary spends to be the worst hit in the days ahead.
We expect the fast moving consumer goods industry to maintain its growth momentum and believe HUL will grow in line with the industry.
At the current market price the HUL stock trades at 22.8x its FY2010E earnings per share (EPS) of Rs11. We maintain our BUY recommendation on the stock with a price target of Rs280.