Hindustan Unilever - Ahead of market growth

The key highlight of HUVR's 2Q08 result was strong volume-led growth in revenue across categories, with overall revenue growing 21.1%, which was ahead of the market's 14%. EBITDA growth at 18% was also impressive. We increase our estimates marginally. Buy reiterated, with Rs266 target price.

Strong underlying growth in all key categories in 2Q08
HUVR reported sales growth of 21.1%, with the core FMCG business growing 18.8%, soaps and detergents 20% and personal products 19%. Overall underlying volume growth was 8.5%. Advertising spend increased 30.5% yoy, or by 70bp as a proportion of net sales, while EBITDA margin fell 60bp yoy. We have reclassified HUVR's EBITDA to include other operating income, as a large part of this income was reimbursement of costs for shared services by overseas entities. Other operating income for 2Q08 also included an element of forex gain, for which no breakdown was given.

HUVR maintains its competitive position in all key categories
Growth in HUVR's FMCG business at 18.8% was ahead of market growth by 4.8ppt. The company has improved market shares (over 1Q08) by 40bp in detergents, 20bp in shampoos, 20bp in oral care, 30bp in tea and 270bp in coffee. However, there was a decline in the inherently high-marketshare categories of soaps (from 54.3% to 52.7%) and skin care (from 54% to 53.4%). HUVR continues to innovate in all key categories and its advertising spend has risen 26% in 1H08.

Macro environment gets challenging
High headline inflation and continued monetary tightening may eventually moderate growth for HUVR in urban markets. However, this could be partly offset by rural markets, which continue to see rising income levels due to increased government spending and better food prices. Despite 20% growth in 1H08 sales, we expect only 18% growth in 2008 and 15% growth in 2009.

Maintain Buy with Rs266 target price
We raise our 2008 EPS estimate marginally and 2009F EPS by 1% post the 2Q08 result. As a result, we increase our DCF-based target price to Rs266 (from Rs261). HUVR trades at 21.3x 2009F earnings, and at our target price it would trade at 23.8x, which we believe is fair based on our projected earnings growth (17%) and above-average returns (129% ROE) for 2008.