Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn. earlier and additional EBITDA margin of 2.9% versus 4.1% earlier.
Recent price reductions ratify our call that consumer staple companies will retain some savings to improve margin profile and intensify advertisement activities and utilize the balance for price reductions to benefit consumers. The recent price reduction on select brands is in-line with expectation. Despite adjusting the above price actions, HUL can implement incremental price reductions of 3.1% without impacting FY10E earnings estimates and intensify advertisement activities.
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Safety cushion still exists
Despite the above price reductions Drawing reference to our earlier report ‘Material Gains’, HUL is riding on net savings of Rs7,637 mn or additional margins of 4.3%. The report highlighted the magnitude of savings and re-iterated our call on partial retention of savings and partial pass through to the consumers. Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Despite adjusting the above price actions, HUL has enough safety cushions to introduce further pricing actions (upto 3.1% blended price reduction), make aggressive spends on advertisement and enough arsenal to combat price competition.
Market Cap: 52,491.42
EPS (TTM): 9.64
P/E: 24.98
P/C: 23.27
Book Value: 16.24
Price/Book: 14.83
Div(%): 900.00
Div Yield(%): 3.74
Market Lot: 1.00
Face Value: 1.00
Industry P/E: 22.94
Maintaining earning forecasts; reiterate our ‘BUY’ recommendation
We had highlighted in our previous reports ‘Drawing Parallel’ and ‘Material Gains’ – that consumer staple companies will retain some savings to improve margin profile and intensify advertisement activities and utilize the balance for price reductions to benefit consumers. Thus, recent price reductions ratify our call and clearly vindicate our observations that consumer companies have unutilized savings benefits through decline in input costs and reduction in excise duty. The recent price reduction on select brands is in-line with expectation. Based on our calculations, HUL can implement incremental price reductions of 3.1% without impacting FY10E earnings estimates. Our earnings forecasts for CY09E remain unchanged at Rs11.7/Share. We maintain our BUY STOCKS rating with target price of Rs305..
Download Stock research PDFSource: Stock report from EMKAY securities
