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Purpose-led, future-fit, high multiples to remain
We attended Hindustan Unilever’s (HUVR) Annual Investor Meet 2019. Key highlights:
* ‘Companies with a purpose last; brands with a purpose grow and people with purpose thrive’ — Management summed up the key to its continued success.
* The decentralization of strategy to a customized level by regional teams (with guardrails provided by top management) is aiding flexibility (exemplified by the WIMI strategy), and also freeing up top management time to ‘focus on longerterm goals, manage disruption, explore inorganic growth opportunities, and land bigger and faster innovation (speed-to-market up 40% in recent years). ï® Management places primacy on data and analytics; it said, ‘Along with the traditional strengths of brands and people, data is now its third key strength’. Further updates were provided on the data-analytics-execution chain that was first discussed last year. Subsequent to recent improvements, this activity is not only superior to FMCG peers in India but also better than many Unilever businesses worldwide, even those in some developed markets.
* Emphasis by management on recent inorganic acquisitions like Indulekha, Adityaa Ice Cream and Glaxo Consumer (and the initial success of the first two acquisitions), makes us believe that management's appetite for acquisitions as a growth medium is whetted and is likely to be a key component of growth.
* HUVR’s sustainability efforts for the larger good: The company has saved >7000b liters water and created water potential in over 5,000 villages, employed over 100k women Shakti entrepreneurs across 18 states, and reused 23,000t of plastic in 2018 — all through the Hindustan Unilever Foundation.
* Valuation and view:
HUVR is likely to continue outperforming on the volumes front v/s smaller players. Compared to the past, four key trends can drive an elevated earnings growth trajectory:
(1) rapidly improving adaptability to market requirements,
(2) recognition and strong execution on Naturals and other evolving categories,
(3) continuous strong premiumization trend, and
(4) extensive employment of technology, creating further entry barriers. Notably, if we incorporate the GSKCH merger (no date clarity yet) in our estimates, it will result in a 10-12% addition to EPS in FY21 which means that the stock is trading closer to 41x FY21 EPS (v/s over 46x it appears currently). We believe that its premium valuations should stay given the company's best earnings growth visibility in the large-cap Indian consumer space and by far the highest return ratios. On a target multiple of 50x Jun'21 EPS, we derive a TP of INR2,070.
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