Further, it is also notable that HUL's performance is likely to continue being superior (versus smaller peers), Motilal Oswal said.
Shares of Hindustan Unilever rallied more than 5 percent intraday to hit a record high of Rs 2,264 on February 12 after Motilal Oswal retained its bullish stance. The brokerage said it is seeing significant 'levers' for the company's earnings growth.
The stock gained more than 13 percent in last one month. It was quoting at Rs 2,255.45, up Rs 102.65, or 4.77 percent, on the BSE at 1052 hours IST.
Hindustan Unilever (HUL) has been a stellar performer over the past decade, both in terms of earnings (around 13 percent CAGR) and stock price which climbed 884 percent in last 10 years.
Also, it has significantly outperformed some of its largecap consumer peers over the same period.
An unprecedented EBITDA margin improvement of more than 900bps YoY over the past 10 years ending FY20 has been led by factors such as (a) superior nimbleness in response to raw material cost and competitive stimuli, which has been boosted further by best-of-breed analytics, (b) strong execution of its 'Winning in Many India' (WIMI) strategy, herbal products and more recently on acquisitions as well, and (c) emphasis on premiumization with rigorous focus on cost savings at the same time.
These above factors are likely to benefit the company in the future as well, Motilal Oswal feels.
From a near-term perspective, favorable base in the next few quarters, expected recovery in the demand environment from Q2FY21, synergies from the GSK Consumer merger, price increase in soaps and lower crude costs are likely to boost earnings, according to the brokerage.
The research house feels earnings are likely to clock an impressive 18-19 percent CAGR over the next two years, continuing the past 3 years' trend ending FY20. "If we take the GSK Consumer merger into account (not in our projections yet as NCLT Chandigarh approval is awaited), EPS CAGR is likely to be even more remarkable at around 23 percent over FY20-22."
Both these earnings growth projections are extremely impressive, especially for a company the size of HUL, which points toward the company continuing its stupendous wealth-generation track record, it said.
Further, it is also notable that HUL's performance is likely to continue being superior (versus smaller peers), it added."Moreover, if trends in the factors leading to HUL's strong earnings growth in recent years sustain momentum, our forecasts on operating margin expansion of 90bp/50bp in FY21/FY22 could be surpassed. This is not
unlikely given the past 5 years' EBITDA margin expansion of 830bp," Motilal Oswal said.
With best-of-breed earnings growth as well as far superior RoEs compared to peers, the brokerage raised its target multiple to 50x FY22E EPS on the merged numbers resulting in target price changing to Rs 2,490 (16 percent potential upside), and maintained buy call on the stock.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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