Friday, October 14, 2016

Company Specific News

1)      Unilever Q3CY16 result indicates pressure on HUL’s Q2FY17 volume growth

·      Demand continue to be sluggish; Commodity driven price hike taken: The Company indicated that Indian markets continue to be weak and have taken commodity driven price hikes.
·      Price hikes taken in skin cleansing segment impact growth: Additionally, the Company has taken price hikes in skin cleansing in response to rising commodity costs which has led to dampening consumer demand for the category in the quarter.
·      For Asia/AMET/RUB segment, Unilever reported volume/value growth of 3.9%/0.6% YoY in Q3CY16 which was better than its overall performance of 3.2%/(0.4%) YoY value/volume growth respectively.

View: For Q2FY17, we estimate HUL to report 5% YoY topline growth with 3% YoY growth in volumes (vs 7% YoY volume growth in Q2FY16). EBITDA/Adj PAT to grow by 11.8%/10.1% YoY respectively with EBITDA margin expansion of 110bps YoY to 18.4%. We have a NEUTRAL rating on HUL with Mar'17 TP of Rs 900.

Management Interview

1)      Foreigners don't question consumer firm valuations, says Dabur CEO Sunil Duggal

·         Experience as a professional manager in a family-owned company: It has been a transition from joining a company that was family-owned and family-run in the mid 1990s—the transition started happening about five years after I joined. It took a while for the whole thing to happen and there were some bumps along the road. Once the company started performing, the promoters withdrew; and they withdrew pretty abruptly. The performance since then has been in line [with expectations] and so they have shown no interest in coming back. Once the family distances itself from the day-to-day operations, it becomes more and more difficult for it to return. The current promoters have a good feel of the company but not so good so as to run it.The company is therefore now hardwired to be run by a professional management.
·         In constant contact with Mr. Anand Burman: We meet over dinner or a drink. He wants to know what is going on. That is more to keep himself informedHis level of information need is higher than that of the other board members.
·         FMCG Growth ratesFMCG growth has come down and it more or less converged with the coming of the present government as they moved more towards creating infrastructure and away from consumption growth. My own opinion, and this is a contrary opinion, is that by October, we should see some visible uptake in terms of consumption but not a dramatic one. So, if a category is growing by 1-2 percent, it would grow by 4-5 percent. These are volume growth numbers. The rationale being a good monsoon and some fiscal stimuli. The UPA-type growth numbers will probably be seen in 2017-end or 2018 because that is when the government will prime the stimulus pump for the next election. No one has won an election by talking about infrastructure building and not about consumption. That is what happened to NDA-1 as they did the right things, but still lost, and I don’t think this government would want a repeat of that. A lot of people feel there is an uptick around the corner, but I don’t think there is any meaningful uptick in the near futureThat will take some time.
·         Rural Growth rate: They [the figures] are down in the dumpsGrowth rates have fallen from 14-15 percent to 1-2 percent. In urban areas, they have come down from 8-10 percent growth to 1-2 percent growth. So the drop has been sharper in the rural segment. If we are to have any meaningful rise in growth rates, rural has to perform. I suspect the stimulus will be more aimed at rural voters and hence, I expect them to come back more sharply.
·         Investors view of FMCG valuationsEvery domestic investor questions FMCG valuations. But no foreign investor questions them. The two have a very different perception of valuation.Foreign investors see 2-3 percent dividend yields from the consumer sector because of high predictability of earnings. For them this is a bonanza because they come from a negative yield environment. Let’s say the foreigners are far more accepting of the valuations. This is the only sector where investors pay as much attention to topline and volume growth as they pay to bottomline growth. The margins are almost taken as a given. Our domestic institutional investor component is quite low—25 percent of all the institutional investment is domestic and the rest is foreign. Among the foreigners, it is typically more sticky. There are some hedge funds, but they prefer to deal with stocks that are larger in size and more liquid. The domestics are not very long term. They book profits quickly. They buy cheap and sell when valuations are stretched. Theforeigners buy and hold even through periods when valuations are stretched.
·         Consumption story when India reaches $5000 or $7000 per capita income from $3000: It’s difficult to paint a picture except that there would be a lot more premiumisation and a sharp fall in low unit packs (LUPs). The discount brands will come down dramatically. Andpeople will look for more value in the product. Many more types of products will kick in like herbal, natural, organic, cruelty-free, etc. These will be the future drivers of growth. The whole consumer health care space will be a high area of investment. We will be investing disproportionately in over-the-counter (OTC) health care.
·         Acquisitions: In India, we have always been on the prowl for companies to buy. Nothing of value is available. These could be big brands, but the asking price is too high and whenever you do the spreadsheets, unless you factor in crazy assumptions of growth, the numbers don’t work.Overseas, our two acquisitions took time to integrate and we had a lot of learning to do as we were not familiar with those markets. Now we are looking at acquisitions again, but with the learnings of the past. First, factor in currency volatility and the inevitable devaluation of emerging market currencies against our currency. We didn’t factor that in as we didn’t realise that currencies could devalue so quickly and so suddenly.
·         On Patanjali: A business of that size does peripheral damage wherever it goes and the damage is magnified because the categories are not growing. The category growth is so slow that whatever little share it takes further adds to the growth stressHe [founder and yoga guru Baba Ramdev] has come at an inopportune time for the sector as a whole. It is a disruptive model and that is why he can scale from zero to Rs 2,500 crore in no timeBut whether he can scale to Rs 20,000 crore is the million dollar question.

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