Overall demand remains soft and Hindustan Unilever has not seen any pick-up in demand/consumption pattern yet, as per the management. While consumer sentiment has improved after elections, it is not yet reflected in the numbers.
Discretionary demand (PP/Premium Foods) remains muted, while low unit packs continue to outperform. For HUVR, we expect volume growth of 5% for 1QFY15, benefiting to an extent from the low base (4% volume growth), while realisation growth is estimated at 5%.
Slow pick-up in monsoon has emerged as a new concern. However, given the dichotomous performance of FMCG sector v/s monsoon trends in FY13 and FY14, we believe the progress of monsoon is more relevant from commodity inflation rather than staples’ rural demand perspective. Except for Skin Cleansing, competitive intensity is unchanged in rest of the categories, as per management. Inflation in PFAD prices has brought down competitive pressures in Soaps.
Oral Care continues to see high competitive spends despite moderation in overall category growth rates (high base impact). HUVR’s volume growth has remained competitive given the context of weak macros and consumer demand slowdown. We like HUVR’s focus on improving fundamentals . However, at 34.1x and 30.8x FY15E and FY16E EPS, valuation remains rich in our view. Maintain sell with a target price of R600 (30x FY16E EPS).
Motilal Oswal Financial Services