MARKET DEVELOPMENT
Fading Fair-and-Lovely Phase
Fading Fair-and-Lovely Phase
03/07/2013 (Financial Express) - HUL is seeing a sequential weakening of market volume growth in its categories. The trend of significant slowdown in more discretionary categories like skin care continues. With price growth also coming off, market growth in many categories risks slipping into single digits.
The depreciation of the rupee and a bounce in palm oil prices have taken away some margin tailwinds. Lower revenue growth takes away operating leverage, and lower growth in the high margin skin care segment leads to weaker mix. Cost rationalisation is the key lever for FY14 Ebitda margin expansion. Q1FY14 is likely to be muted despite strong gross margin expansion on low palm oil prices, as this will be largely neutralised by lower other income, royalty increase and higher tax rate.
HUL will find it challenging to deliver double-digit revenue growth in FY14 as price growth comes off. With earnings CAGR of 10% over FY13-15, we see no upside in the near term. We increase our target price to R541 (from R500) as we increase target multiple to 29x (times), in-line with HUL’s three-year average P/E (price-to-earning) ratio
We expect muted Q1 despite gross margin expansion: Q1FY14 is likely to see muted volume growth, given the overall weakness in market volume growth. In Q1FY14, there is also a likely de-stocking impact of 80 bp (basis point) on volumes, which will be a reversal of the upstocking we saw in Q4FY13 due to the expectation of a transport strike. HUL’s pricing growth is also likely to come off from 6% in Q4FY14 to 4% in Q1FY14, largely led by lower price growth in detergents. This revenue growth has the risk of slipping into single digits. Gross margins will see strong expansion as palm oil prices were lower 30-40% year-on-year and other crude-linked commodity costs were also benign. However, other financial income is likely to decline on a very high base and the tax rate will likely move up 300 bp from 24% to 27%. These would to a large extent neutralise the Ebitda margin expansion likely for HUL.
Will HUL get shares in the open offer? Building in a scenario similar to GSK Consumer, where 28% FIIs, 95% DIIs and 37% retail tendered in their shares, Unilever would likely get 17-18% of HUL shares, which would be lower than its aim of 22.5% shares.
Valuations will get support from lower liquidity, expectation of creeping acquisition or buybacks: The above scenario would lower the free float substantially from 48% to about 30%. The lower float and the expectation of creeping acquisition or buybacks by the company to take up its shareholding to the intended 75% will act as support against a significant correction in valuations. However, we see no upside as the stock trades at 34x one-year forward earnings, which is close to its peak at any point of time in the past 12 years.
While HUL is facing a slowdown in revenue growth, what sets apart this phase from the 2000-2004 slowdown is that the company is holding or gaining market share. The innovation pipeline continues to be robust, and the company is focussed on the long term.
The depreciation of the rupee and a bounce in palm oil prices have taken away some margin tailwinds. Lower revenue growth takes away operating leverage, and lower growth in the high margin skin care segment leads to weaker mix. Cost rationalisation is the key lever for FY14 Ebitda margin expansion. Q1FY14 is likely to be muted despite strong gross margin expansion on low palm oil prices, as this will be largely neutralised by lower other income, royalty increase and higher tax rate.
HUL will find it challenging to deliver double-digit revenue growth in FY14 as price growth comes off. With earnings CAGR of 10% over FY13-15, we see no upside in the near term. We increase our target price to R541 (from R500) as we increase target multiple to 29x (times), in-line with HUL’s three-year average P/E (price-to-earning) ratio
We expect muted Q1 despite gross margin expansion: Q1FY14 is likely to see muted volume growth, given the overall weakness in market volume growth. In Q1FY14, there is also a likely de-stocking impact of 80 bp (basis point) on volumes, which will be a reversal of the upstocking we saw in Q4FY13 due to the expectation of a transport strike. HUL’s pricing growth is also likely to come off from 6% in Q4FY14 to 4% in Q1FY14, largely led by lower price growth in detergents. This revenue growth has the risk of slipping into single digits. Gross margins will see strong expansion as palm oil prices were lower 30-40% year-on-year and other crude-linked commodity costs were also benign. However, other financial income is likely to decline on a very high base and the tax rate will likely move up 300 bp from 24% to 27%. These would to a large extent neutralise the Ebitda margin expansion likely for HUL.
Will HUL get shares in the open offer? Building in a scenario similar to GSK Consumer, where 28% FIIs, 95% DIIs and 37% retail tendered in their shares, Unilever would likely get 17-18% of HUL shares, which would be lower than its aim of 22.5% shares.
Valuations will get support from lower liquidity, expectation of creeping acquisition or buybacks: The above scenario would lower the free float substantially from 48% to about 30%. The lower float and the expectation of creeping acquisition or buybacks by the company to take up its shareholding to the intended 75% will act as support against a significant correction in valuations. However, we see no upside as the stock trades at 34x one-year forward earnings, which is close to its peak at any point of time in the past 12 years.
While HUL is facing a slowdown in revenue growth, what sets apart this phase from the 2000-2004 slowdown is that the company is holding or gaining market share. The innovation pipeline continues to be robust, and the company is focussed on the long term.