Reduce Hindustan Unilever Ltd For Target Rs. 2,503 - Yes Securities
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Strong quarter but near‐term demand/ commodity headwinds can bring down valuations
Result Highlights
* Quarter results – 34.6% growth in topline (21% ex‐GSK with 16% volume growth), 150bps EBITDA margin improvement and 41% PAT growth; home care grew 15%, personal care grew 20% and foods grew 36% ex‐GSK; dividend increased from Rs 25 in FY20 to Rs 31 in Fy21 (in addition special dividend of Rs 9.5 increased payout to Rs 40.5 per share).
* Portfolio mix – Health, hygiene and nutrition portfolio grew 22%, discretionary grew by 10% and out of home grew by 61% from a low base; FY21 growth rates for 3 segments were 12%/‐15%/‐26% respectively.
* Margin improvement despite headwinds – Despite inflation in prices of palm oil, tea, crude oil and increased competition, margins improved due to a 2% sequential pricing increase, increased cost savings and GSK nutrition business synergies.
Valuation and view ‐
The 4Q performance by the company was marginally ahead of expectations as laggard segments like detergents, cosmetics, skin care have recovered well and margins also improved. Going forward, nutrition portfolio should be a key growth driver for the company. The company is well placed to grow ahead of the market given its innovation initiatives, distribution expansion and digital initiatives. Despite sharp commodity inflation, margins moved up indicating HUL’s strong and agile pricing strategy in addition to its strong cost savings agenda, which should help it gain market shares till the time commodity inflation sustains.
But given the near‐term headwinds on both the demand and margin fronts, we believe the stock is fully priced around current valuations with limited absolute upside. Although we do not expect a significant correction in the current market volatility given HUL’s solid defensive characteristics, we would still advise waiting for a better entry point for further buying. We model in revenue/EBITDA/PAT CAGR of 11%/13%/14% over FY21‐23E and assume coverage with a REDUCE rating with a PT of Rs 2,503 based on 55x FY23E earnings, a 10% premium to its 5‐yr average multiple.
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