HLL.BO, Hindustan Unilever (Rs299.40) /F2004 vs. F2011 – Mapping Stock
Performance during Heightened Competition
Reiterate Underweight: We believe HUL’s EBITDA margin has peaked for now. Rising input
costs amid intense competition and slowing revenue growth are likely to constrain earnings. We
see a disconnect among industry fundamentals, with intense competition that threatens to disturb
market share equilibrium across categories, and stock valuations that at 29x 12-month forward
earnings are up 25% over the past six months.
What’s in the price: In the current cycle, the stock has been re-rated even as operating margins
continue to slide. The market seems to be factoring in a scenario of fragmented and sporadic
competitive activity. Contrary to this, we believe that ongoing competitive activity is likely to be
sustained – it is driven by players with long-term commitments and strong balance sheets. Even if
our concerns on cost and competitive pressures eventually prove exaggerated, current
valuations leave little room for outperformance, in our view.
Severe input cost pressures across categories: HUL is likely to err on the side of caution
while passing on input cost pressures to the consumer. Its focus on defending market share will
likely delay hike prices and thus increase in the volatility in margins, near term..
