HUL – Recommend to Hold Post Sept 2012 Numbers

Fast Moving Consumer Goods (FMCG) heavyweight Hindustan Unilever (HUL) recently reported its quarterly numbers. The company's topline grew by 11.59 per cent to Rs 6155 crore (with volume growth of 7%) while its Net Profit grew by 17% to Rs 807 crore on a YoY basis.

HUL has consistently seen a drop in its volume growth over the past couple of quarters, which has increased concerns of growth slowing down going ahead. The general market consensus expected the volume growth be above 8%. This has affected its share price which has corrected by approximately 4% to Rs 540 per share post the result till date. The following table gives us a look at the company’s Sept quarter performance:

While the street’s expectations were not met, there were some positives. Despite higher raw material expenses, the company managed to post higher EBITDA margins. The raw material-to-sales ratio increased by 183 bps to 42.8%. Despite this, on the back of higher realisations, the EBITDA also increased by 74 bps to 15.48%, which is good. High competition from its industry peers resulted in the company focusing on advertising, due to which its advertisement expenses increased by 18% on a YoY basis and the advertisement-to-sales ratio increased by 57 bps to 12.19%.

HUL's major segment, viz. soaps and detergents, which contributes around 50% of its revenues, saw a decent growth. The revenue from the segment grew by 22% to Rs 3176 crore, while the profit from the same grew by 41% to Rs 453 crore on a YoY basis. The margins in the segment increased by 190 bps to 14.27% –this could be due to the softening of the prices of palm oil, a key input for the segment. Other segments like personal products, beverages and packaged food grew in double digits like 12.10%, 10% and 10.23% respectively. On the profits front, packaged food posted a profit of a meager Rs 0.9 crore against Rs 16.47 crore in the similar period last year.

The company has declared a special dividend of Rs 8 per share along with an interim dividend of Rs 4.50 per share. This adds up to a total of dividend Rs 12.50 per share, resulting in a dividend yield of 2.31%, which is very good. However, it is currently trading at 12-month trailing PE multiple of 31x, which is slightly on the higher side. Going ahead, we believe that the slowing of volume growth could have an impact on the company's sales. Further, due to higher competition in the industry, it may lose some of its market share, which has also happened in the past.

We believe that one could see some southward movement in the scrip in the short term. Hence, one can invest in the scrip in a staggered manner, keeping a long-term horizon in mind. Those who already have invested should hold the counter as of now.