Q4FY17 core PAT of Rs 11.18 bn was a beat on our estimates. Margins in the Home Care segment and lower advertisement following brand marketing investment (BMI) savings were the key positives. HUL is confident that the premiumisation trend is still intact and reiterated the guidance for modest margins improvement. HUL remains our top pick in the large-cap consumer space; we maintain Buy and increase our target price to Rs 1,150 from Rs 1,000 earlier.
Home Care: Broad-based growth driven by premium segment; Surf sustains strong volume-led growth momentum. Personal Care: Growth rebounded in both Personal Products and Personal Wash. Fair & Lovely relaunch was well received, while Hair Care delivered broad-based double-digit growth. Foods: Modest growth in packaged foods and Refreshments: Robust growth was sustained.
Conference call takeaways
HUL is confident that a good monsoon would turn the sentiment positive. Rural growth is still lower than urban growth rates, given the demonetisation impact. Input costs are now stabilising and the company continues to focus on costs savings to deliver a modest improvement in margins.
Change of estimates
Pricing is running ahead of cost inflation as we see a benign cost environment in 1HFY18. Margin improvement in the Home Care segment is a testimony of HUL’s ability to drive premiumisation. We have reduced our revenue growth forecast while increasing the margins assumption.
We value HUL using a DCF-based methodology, with a WACC of 10.4%, earnings CAGR of 21.9% from FY17-19e and 12.0% from FY20-29. A perpetual growth rate of 6% is assumed thereafter. HUL is currently trading at a 12-month forward P/E of 38.9x, which is an 8% discount to the broader consumer sector. Given HUL’s leadership position, we believe this discount is unwarranted.