Cluster: Apple Green
Price target: Rs280C
urrent market price: Rs235
Price cut to combat competition
Hindustan Unilever Ltd (HUL) has reduced the prices of three of its soap brands ?Lux, Hamam and Rexona?to pass on the benefits of excise duty cut in soaps to the consumers. It has reduced the price of Lux 100gm soap to Rs16 from Rs17 and of Lux 45gm soap to Rs5 from Rs6. HUL's soap volumes grew by just 1.5% in CY2007. With the recent price cut, the company expects the volumes to improve for some of its strong brands.
In view of the rising palm oil prices, the price cut by HUL seems to be out of place, however this seems to be the right strategy to counter the recent launches in soaps from its major competitor?ITC.We believe in spite of the steps taken by the government to control inflationary pressures, edible oil prices would settle at higher levels for the near term. However, we sense that the price cut in some of the soap brands by HUL is a short-term phenomena to combat the competition from the new soap launches by ITC, as surging input cost will pressurise the soap margins. Going forward, we expect HUL to drive its growth by expanding its presence in high-margin premium personal care and food segments.
At the current market price of Rs235, the stock trades at 25.2x its CY2008E earning per share (EPS) of Rs9.30. We maintain our Buy recommendation with price target of Rs280.
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