Motilal Oswal 's research report on Hindustan Unilever
HUVR’s 2QFY21 health, hygiene and nutrition portfolio (80% of the portfolio) grew 10% YoY (v/s ~6% in 1QFY21), discretionary categories (15% of portfolio – skin care, cosmetics, deodorants) declined 25% YoY (v/s ~-45% in 1QFY21), and out-of-home categories (5% of sales) declined 25% YoY (v/s ~-70% in 1QFY21). The company is seeing (a) ad-spends inching up (-5% YoY; ahead of expectations), (b) sharp increase in palm oil costs, and (c) mix deterioration. Thus, HUVR did well in growing its EBITDA margins (including GSKCH) by 30bp YoY and restricting like-for-like margin decline to only 60bp YoY. Margin outlook for HUVR has also improved as share of its discretionary portfolio to total sales should increase sequentially. Outlook for the company is gradually improving. The discretionary part of its portfolio (15% of sales) is seeing gradual recovery. In a period of relative normalcy, we believe that HUVR (as has been the case in recent years) is likely to post superior earnings growth, leading us to maintain Buy rating.
We remain positive on HUVR from a medium-term perspective encouraged by: (a) robust earnings growth potential beyond the near term owing to its portfolio and execution strengths, and (b) significant synergies in FY22E as a result of GSKCH. These factors suggest premium multiples are likely to sustain. Valuing the company at 55x Sep’22E merged EPS, we arrive at a TP of INR2,620, implying a 21% upside.
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