JM Financial recommended hold rating on Hindustan Unilever with a target price of Rs 1490 in its research report dated June 04, 2018.
JM Financial's research report on Hindustan Unilever
The Chairman’s statement refers to FY18 as the ‘seventh consecutive year of both topline growth and margin improvement’ – we don’t think there are many other companies who can boast of margin-expansion for seven years in a row. Other positives include: 880bps improvement in ROE, 17% growth in cashflow from operations plus 39% FCFF growth, working capital fell further to -10.9% of sales vs -9.3% - these are now par for the course. What we found interesting were: 1) The way royalty has been classified this year in the annual report to now exclude ‘fees for central services from parent company’ which is no longer being clubbed as part of ‘royalty’ – this re-classification pegs royalty rate at 1.9% of net sales and is now below the 2% threshold specified by SEBI above which shareholder approval could be required under the new proposals. 2) HUL’s contribution to exchequer fell 21% YoY while its net profit rose c.20%. A large part of this decline is likely attributable to the reduction in GST rates on HUL’s portfolio, benefits of which, as per management, has been entirely passed on to consumers through effective price reductions.
Stock seems priced for perfection to us – even if profits grow 20% p.a. over each of FY19-20E, a 50x PER on that earning would yield a mid single-digit return vs CMP.
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