Growth for the consumer sector moderated during the December quarter. We believe that the March quarter could be even weaker for Hindustan Unilever (HUL). Despite the recent stock underperformance, valuations remain rich at 32.8x FY15E EPS. Maintain ?sell?.
According to the management, growth for the consumer sector moderated during Q3FY14, both in terms of volume and value, driven by deteriorating demand. We believe Q4FY14 could be weaker than Q3FY14 for HUL.
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The moderation is across categories and geographies, with discretionary categories facing disproportionate impact. The beneficial effect of a good monsoon has not been felt, reflecting the non-relevance of monsoon swings (barring sentiment boost). While it has not seen down-trading, HUL is witnessing slowdown in the pace of premiumisation.
Q4FY14 will face tough comparisons due to a 100-bps positive impact of pipeline filling ahead of the transporters? strike in the base quarter. While pricing has improved in soaps due to raw material inflation, in beverages, it will fade further due to the anniversary effect. Pricing contribution to sequential revenue growth could remain flat. We build 8% revenue growth for Q4FY14.
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Personal products performance has progressively worsened, with industry panel data indicating moderation in growth rate for Oral Care as well. Skin Care continues to be the most impacted part of HUL?s portfolio. While competitive intensity has not changed meaningfully and media GRPs continue to hold, non-consumer GRPs are lower, putting downward pressure on prices.
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