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Published on 14/09/2021 12:10:25 PM | Source: Emkay Global Financial Services Ltd

Hold Hindustan Unilever Ltd For Target Rs.2,700 - Emkay Global

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Stepping up digital innovation to stay ahead of competition

HUL’s annual investor meet highlighted emerging trends, the company’s growth initiatives across categories, and its R&D and digital prowess. Management remains upbeat on the medium-term growth outlook and expects to maintain double-digit EPS growth.

The commentary emphasized significant leverage on data analytics and technology across functions, which will be a competitive advantage, going ahead. We expect some improvement in growth as increasing mobility could drive a recovery in the laundry/beauty segments, which we have factored in our forecasts as well.

Post the recent run-up (61x/54x FY23/24E EPS), limited upside potential keeps us neutral on the name. We await a more visible pick-up in earnings growth after recent underperformance vs. peers. Maintain Hold with a Sep’22E TP of Rs2,700, valuing it at 55x Sep-23E EPS (47x Sep-23E EPS earlier). Correction in key commodity prices can offer upsides to forecasts whereas rural slowdown remains a risk.

 

* Upbeat on medium-term growth outlook: Management is optimistic on medium-term growth outlook and targets double-digit EPS growth. HUL continues to drive strong cost savings and expects another 300-400bps margin gain to come from GSK distribution and supply-chain synergies. Pricing actions across tea/laundry/skin cleansing are expected to offset high cost inflation, and it expects to maintain a healthy margin of 24-25%.

 

* Step-up in digital, premiumization and naturals play across categories: Within BPC, management highlighted its improved performance of the skin cleansing portfolio, with Lifebuoy leading in the hygiene segment and WIMI play under Lux. The naturals play is being strengthened (Indulekha, Love Beauty & Planet and Simple), and it has also formed a premium beauty business unit to target leading trends and achieve more agile and faster innovation. In Home care, HUL has a major share in the premium laundry segment, with Surf being a Rs50bn+ brand now.

The premiumization opportunity in laundry is huge - premium is just 14% of the market now, with mid/mass-market at 14%/72%. F&R growth outlook remains strong, with the nutrition expected to see 2x reach expansion by Dec’21 (vs. baseline), ‘Plus’ range expanded with science-based offerings and Boost rolled out nationally. HUL expects 300-400bps margin gains from distribution and supply chain synergies, a part of which will be deployed in marketing. In foods, new products such as mayonnaise, peanut butter and meal makers have been introduced, targeting on-trend innovations. Food solutions (Rs25bn market) is being scaled up with a focus on seasonings.

 

* HUL is much ahead in data and tech capabilities and is leveraging it across the organization: In the last few years, HUL has invested significantly in data, technology and analytics. These capabilities are leveraged across different functions in the organization, including the identification of consumer trends and faster innovation, agile manufacturing (nano manufacturing) and supply-chain efficiencies (automated warehousing/delivery tracking), effective marketing and winning in new channels. AI/ML usage for commodity & demand forecasting and nano manufacturing for smaller batches (e-commerce and premium products) were highlighted. Shikhar, the eb2b platform has been expanded to 0.6mn outlets now and is seeing faster adoption by retailers after the pandemic.

 

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