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HUL: Conference call extracts - Views on News from Equitymaster
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HUL: Conference call extracts
Jun 29, 2010

We recently attended the 4QFY10 conference call of Hindustan Unilever Limited (HUL). The company is India’s largest FMCG company with a portfolio in soaps, laundry, hair care, personal care, toothpastes, foods and beverage and water purifier.

The sales of the company were subdued in 4QFY10, growing by 8% YoY. This was despite a robust volume growth of 11% YoY. The reason for this was the price correction during the quarter. Bottom line of the company increased by 47% YoY because of extraordinary income. However, when adjusted for extraordinary income, the bottom line fell by 23% YoY during the quarter.

HUL faced a tough 4th quarter. While the FMCG space grew, the pace was slower than the previous year’s. Another highlight for the quarter was the increase in competitive intensity. HUL saw aggressive pricing by its competitors as well as increase in media spending. Nevertheless, the overall growth of HUL was ahead of the market and was volume based. The company was also hurt by high food inflation.

During the quarter HUL launched several new products. The company entered the male grooming segment with Vaseline men. In beverages, the company launched Sehatmand under Brooke Bond. This is a tea priced for the mass market and is positioned on the nutritional platform. The company further launched an innovative product in foods called Knorr Soupy Noodles. HUL also launched Pureit Compact for the mass market.

HUL has also launched an initiative called the "Perfect Store". Under this, the assortment of products in every single store is tailored to the shopper’s profile. Moreover, the store is designed so that all the merchandise is visible. While the cost of changes to the store is borne by the retailer, HUL by this initiative is able to better understand the needs of the customer and is able to highlight its own products.

HUL believes that all its categories have got head room for growth and none of them are mature yet. While discussing the prospects of the detergent business, the company commented that penetration is not the only matrix for growth. Consumption is also a driver. Laundry consumption in India is 60% of what is being consumed in China. Hence, there are significant growth opportunities in this segment in spite of high penetration levels. The company is looking to premierise the laundry segment by launching products like fabric conditioner to provide new growth sub categories.

One concern for the quarter has been that despite high advertisement spending, the growth of the market has been slower than that in the same period the previous year. Management believes that it is wrong to judge the growth of the company. This is because the company has invested in brand building for the long term and there may be aberrations for a quarter to two due to other factors. The company is confident that the advertisement spending being carried out by it will give it rich dividends in the long term.

On the rural front, the company has already got distributors in 50,000 villages. However, to continue to benefit from the rural growth story, the company plans to increase the number of villages under coverage. The company is also looking at various models to tap villages which have so far been uneconomical to distribute.

What we expect
As a price of Rs 263, the company is trading at 18.7 times our FY13 estimates. We remain concerned given the growing competitive intensity for HUL. At the current price levels, we feel that the stock is fairly priced from a medium term perspective. Hence we would advice caution on this stock.

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