Hindustan Unilever - Demand as usual; high base awaits 2HFY13 - Motilal Oswal

Positive on medium- and long-term prospects; Neutral on rich valuations

Key takeaways from our recent interaction with Hindustan Unilever (HUVR) management:

- Consumer demand remains healthy except for moderation in some discretionary categories in Foods and Personal Care. This moderation seems temporary; long-term potential of these categories remains unchanged.

- HUVR does not rule out entering the premium Hair Oil category. However, it would not play in the commoditized part of the segment.

- Correction in input prices may increase competition in the lower end of HPC categories. However, HUVR is seeing growth across all segments (premium, mid and mass), and hence sees limited impact, if any, of rising regional competition induced by potential correction in input costs.

- Recovery in Oral care category will be gradual. Recent launches in sensitive part of the category (Pepsodent Expert Protection Range and Mouthwash) have been well accepted. More corrective actions are likely in the category.

- We expect 8-9% volume growth in 2QFY13. However, limited pricing action and comparatively higher base should restrict margin expansion. We estimate 60bp YoY operating margin expansion.

- HUVR's medium-term growth will be driven by tailwind benefits from the recent distribution expansion as well as aggressive innovation/new launch funnel. While we are positive on HUVR's medium- and long-term prospects, the stock trades at multiyear high P/E of 34x FY13E and 29x FY14E, which adequately captures the positives. Maintain Neutral.

Source : Equity Bulls

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