IGI Logo

Discretionary demand recovers on positive metro sales

We interacted with the management of Hindustan Unilever (HUVR) for an update on overall market conditions. Here are the key takeaways:

Macro environment

* The overall FMCG sector is seeing steady revival.

* Urban growth, led by smaller urban centers, has been positive in recent months.

* Since Jan’21, metro and modern trade sales have been positive.

* The good winter season demand seen in November and December continued into January and February.

Broad segmentals and key components

* Given 9% decline in overall sales in 4QFY20, all of the categories are likely to report strong growth, especially with the addition of GSKCH.

* On a sequential basis, some demand (amount unspecified) in skin cleansing and home consumption products has tapered off.

* Discretionary products (15% of sales – flat in 3QFY21, after 25% decline in 2QFY21 and 45% decline in 1QFY21) and OOH (5% of sales – 15% decline in 3QFY21, after 25% decline in 2QFY21 and 69% decline in 1QFY21) continued to post improving sequential growth. Recovery in urban, particularly metros, and modern trade (indicated earlier) has played a big part on this front.

* Importantly, from the margin perspective, the Laundry category has recovered as people have started stepping out more in the past 3–4 months and the earlier bulk buying impact has worn off, leading to fresh purchases.

Costs and margins

* Ad spends are increasing as consumer confidence rebounds.

* EBITDA margins would improve YoY off a low base – both on standalone and consolidated bases, due to the inclusion of the high-margin GSKCH business – but maybe flat sequentially due to ongoing material cost increases.

* Realization growth in 4Q would be substantially higher than 3Q, primarily on account of price increases taken in December and January

Valuation and view

* As mentioned in our Corner Office note and detailed note on the Annual Report, the structural and near-term investment case for HUVR remains strong.

* The company’s earnings growth has gained further momentum in recent years (17% EPS CAGR in the three years ended FY20 v/s a ~12% CAGR over the last 10 years). This is particularly impressive given the weak mid-single-digit earnings growth posted by (much smaller) peers in recent years. HUVR’s best-of-breed analytics and execution capabilities (demonstrated via the successful implementation of the WIMI strategy, cost-saving plans, herbals, etc.) are key factors driving the pace of earnings growth.

* With the resumption of growth in the high-margin categories of a) Discretionary products and b) Detergents, the EPS growth trajectory going forward is likely to return to a CAGR in the high teens from FY22. Significant synergies from GSKCH are also likely to be observed from FY22.

* HUVR is trading at 45.6x FY23E EPS, a substantial discount to its historical five- /three-year forward P/E of 51.4x/57.5x.

* Valuing the company at 55x FY23 EPS, we arrive at TP of INR2,690. Buy.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer