Hindustan Unilever: Price cuts will hurt

Depletion in market share and a slowdown in revenue growth, particularly in soaps and detergents, are key concerns.

The fast moving consumer goods (FMCG) industry is witnessing yet another round of price wars with big-wig Hindustan Unilever (HUL) locking horns with Proctor & Gamble (P&G) in the soaps and detergents category. The last time the industry witnessed such rivalry was in March 2004, when P&G slashed the prices of its Tide and Ariel brands by 20-50 per cent. Then after, HUL saw erosion in its profit margins and market share. Little wonder, analysts are not positive on HUL’s stock.

HUL recently resorted to around 30 per cent price cut in Rin. It also cut the grammage of Lux soap to 90 gm from 100 gm, while lowering the price to Rs 15 (Rs 18). This translates into an effective price cut of 7.4 per cent. For HUL, the soaps and detergents category contributed nearly 45 per cent to revenues (Rs 4,585 crore in December 2009 quarter).

P&G responded back by 25 per cent grammage rise in its detergents — Tide and Tide Naturals —which analysts suggest equates to a price cut of around 20 per cent. While Tide’s price remains at a 12 per cent premium to Rin (both mid-segment brands), Tide Naturals is seen eating into some of HUL’s volumes in rural and semi-urban areas (in value segment), suggest analysts.

HSBC analysts expect there could be more price cuts before the situation stabilises, putting pressure on HUL to cut prices further. Moreover, the risk of a price war spreading to other products, such as shampoos (around 10 per cent of HUL’s Ebit) also exists.

Post the price cuts, analysts expect HUL to post 10.2 per cent CAGR in topline over FY2010-12E. Religare Hichens Harrison expects 8 per cent volume growth in the detergent category, with a weighted average price cut of 5 per cent in 2010-11. Rising raw material prices such as palm oil, LAB and HDPE is expected to worsen the overall impact.

Depletion in market share and a slowdown in revenue growth, particularly in soaps and detergents, are the key concerns for HUL. Its stock has shed over 7 per cent in March 2010 and currently trades at 22.5 times 2010-11 consensus analysts’ earnings estimates.