HUL Q3FY12 Results Review

FMCG (fast moving consumer goods) heavyweight Hindustan Unilever (HUL) announced its third quarter results on February 6, 2012, reflecting an overall good performance. Yet the shares tanked by almost 3.5 per cent on the day of the results. This was due to the management guidance that indicated towards increasingly stiff competition that is likely to affect the growth curve going ahead. Today the shares are trading higher by 0.52 per cent at Rs 390.

The strong consumption demand and a vast portfolio of its products have led to good growth for the company. In the December quarter of 2011 the net sales of the company increased by 16.43 per cent to Rs 5,852 crore while the net profit of the company surged by 18.24 per cent to Rs 753.81 crore. The sales growth was a combination of price and volumes. Around 9.1 per cent of the sales growth was volume-driven while the remaining 7.33 per cent was due to growth in realisations. The EBIDTA margin of the company increased by 216 basis points to 16.58 per cent. This was on the back of lower advertising expenses and also on account of managing the running costs efficiently.  

It is very surprising to see that the advertising and sales promotion (ASP) expenditure of the company has been on the declining side. It decreased by 7 per cent to Rs 690 crore in the third quarter of 2011. The ASP has a lag effect and therefore the company may see its effect in Q4FY12. In the third quarter the raw material expenditure increased by 20.59 per cent to Rs 2,341 crore on a YoY basis. This was primarily on the back of the rupee which depreciated by 18 per cent to Rs 52.6 from July to December 2011. However, the rupee has sharply appreciated in 2012 and is at Rs 49.34. We believe that any further appreciation of the rupee will definitely help the company.

The company’s soap segment continued to perform well and registered a growth of 20.66 per cent. The disappointment was from the personal products segment which grew by 14 per cent against a growth of 18.2 per cent in the September 2011 quarter. Even the profit from the segment grew marginally by only 2 per cent while the other segments like packed food and beverages grew by 13 and 11 per cent respectively.

Even the nine-month performance of the company grew on similar lines of the third quarter wherein its topline increased by 16.39 per cent to Rs 16,878 crore while the bottomline increased by 19.17 per cent to Rs 2,069 crore. The company faces headwinds on account of multiple factors like the competitive scenario, inflationary pressure combined with the volatility of the rupee and the uncertain global environment. On the other side, the positive factor is the rising consumption demand, strong portfolio, deeper rural coverage, etc which will further benefit the company.

HUL though outperformed the market in CY2011. However, in 2012, on a year-to-date (YTD) basis, the scrip has lost 4.41 per cent against the Sensex which gained 14 per cent. At the current market price of Rs 390, HUL is available at a trailing price to earnings multiple of 32 times. Being an industry leader it will command higher valuations but we believe it is looking very expensive at the moment. In our opinion, HUL should trade at a price to earnings multiple of around 30 times and with this its fair value works out Rs 366. We would advise our readers to avoid the scrip in the short run and buy it when it undergoes some correction.