Why higher target price is justified for HUL

On the back of better than expected Q4 earnings from Hindustan Unilever (HUL) on most fronts, Sanjay Manyal Of ICICI Direct says, they would be looking at upping their target price on the stock.

HUL beat expectations in the fourth quarter by registering a 14.6 percent year-on-year rise in its net profit to Rs 787 crore. Net sales grew slightly higher-than-expected by 12.5 percent to Rs 6,367.1 crore from Rs 5,660 crore Y-o-Y. Now, he says, the market is reacting positively on the stock because most of the negatives were factored-in, in the last quarter itself. “Last quarter the stock was trading around 30 odd multiples and right now it is trading around 25 multiples,” he adds Also read: HUL Q4 beats street, net up 14.6%; stock rises 4% Despite an increase in their ad expenditure their margins improved which is another positive for the stock, he opines. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Your quick comment on what you have made of the sales growth of Hindustan Unilever (HUL) which is coming a little better than expectation, as well the profits. What are your first thoughts? A: Volume growth has been around 6 percent which is better than our expectation of 5 percent. So, it seems a positive number. Q: They have reported 15 percent EBITDA margins, anything more specific in terms of margins that surprises you? A: That is positive though marginally lower than what we were expecting but it is better than consensus. However, soaps and detergents grew 13 percent which was in line with out expectation and personal products 12 percent which is marginally below our expectations. The surprise would be on beverages side, 18 percent kind of volume growth which we haven't seen earlier. However, packaged food at 7 percent is in line. Q: HUL has beaten the margin estimate by 50 bps and they have actually performed better than what the market was estimating in terms of volume growth. Do you think the street is right in giving the 3 percent reward to the stock and what would be your initial estimate on where the stock could settle? A: In the last quarter they had 5 percent of volume growth, which was disappointing and the royalty payment was also disappointing. That is why the stock was down around 15 percent odd. However we believe that most of the negatives were priced-in, in the last quarter itself and now this better than expected 6 percent volume growth is positive for the stock. Last quarter the stock was trading around 30 odd multiples and right now it is trading around 25 multiples. So market is reacting positively which is not surprising. Q: A word on advertising, it is Rs 821 crore versus Rs 677 crore. Is that a surprise to you or not quite? A: We were expecting around 13 percent price to sales in advertisement. Right now it is around 15 percent, which is not surprising. There was been a drop in the raw material cost and the company has passed that on by increasing ad expenditure. But despite increasing the ad expenditure their margins have improved which again seems like one more positive. Q: So what is your view on the stock at this point in time? Will you be looking to up both your recommendation as well as your target price? A: We had a hold rating after the last quarter results. We will work out the details but it seems that target price should go up.