Hold Hindustan Unilever Ltd For Target Rs.2,750 - ICICI Direct
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Pricing led growth; cost inflation to persist…
About the stock: Hindustan Unilever (HUL) is the biggest FMCG company in India with more than 40 brands across categories. It is the market leader in fabric wash, personal wash, cosmetics, shampoos and many other categories.
* The company has a distribution reach of ~8.0 million (mn) outlets with a direct network of more than 3.5 mn
* HUL acquired GSK Consumer Healthcare’s business in 2019 and integrated Horlicks and Boost brands with the foods & refreshment segment
Q2FY22 Results: HUL’s numbers were on expected lines for Q2FY22
* Sales were up 11% YoY with muted 4% volume growth
* EBITDA was at | 3132 crore, up 9.2% YoY, with margins at 24.6%
* Consequent PAT was at | 2187 crore (up 8.8% YoY)
What should investors do? HUL’s share price has gone up by ~3x over the past five years (from ~| 850 in October 2016 to ~| 2510 levels in October 2021).
* We expect volume growth to remain dismal in the medium term on high base & grammage reduction
* We downgrade our rating from BUY to HOLD on the stock
Target Price and Valuation: We value HUL at | 2750 i.e. 56x P/E on FY24E EPS
Key triggers for future price performance:
* Synergistic benefits of integration of nutrition business (Horlicks & Boost) to drive cost rationalisation
* Strong visible premiumisation trend, specifically in fabric wash
* Steep commodity inflation to continue driving pricing growth but keep margins under check
* Increased effective coverage, assortment by 1.2x, 1.4x, respectively, in Q2
* Digital initiatives are capturing more than 10% of the business
Alternate Stock Idea: Besides HUL, we like Zydus Wellness in our FMCG coverage.
* It is growing at a steady pace in nascent categories with strong presence in health, nutrition space & margin expansion possibilities
* Trading at a significant discount to FMCG peers. BUY with a TP of | 2,800
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