1. Beating estimates, a strong Q1FY18

Beating estimates, a strong Q1FY18

Results see Ebitda margin estimates for FY18F go up by 120 bps; however, stock has limited upside given expensive valuations

By: | Published: July 24, 2017 3:35 AM
Results see Ebitda margin estimates for FY18F go up by 120 bps; however, stock has limited upside given expensive valuations

Q1FY18 numbers beat both our and the Street’s revenue growth and Ebitda forecasts, signifying three key positive trends: (i) steady core business growth momentum despite GST-related disruptions; (ii) pricing action continues to return to the portfolio, and; (iii) soft input prices enabling HUVR to raise advertising spends. While we maintain our revenue growth estimates of 13.5% for FY18F and FY19F each, we raise our Ebitda margin estimates and now build in 120 bp improvement in Ebitda margins in FY18F. However, with the stock trading at close to 2SD its long-term average valuation multiple, further potential upside from current levels appears challenging, and we maintain Neutral.

Business momentum remains strong, soft commodity prices to aid Ebitda margin expansion
We continue to like HUVR due to the breadth and depth of its product portfolio, and for this reason we see it as a key beneficiary of any uptick in consumption. Furthermore, soft input prices should allow gross margins to expand. This, along with a focus on cost control, should allow for further Ebitda margin expansion from already peak levels.

Trades at 2SD above LT average; expensive valuations
The stock currently trades at 40.7x FY19F P/E, 2SD above its long-term average. While we continue to like the stock, after the recent run-up, we see limited potential upside. We maintain our Neutral rating, but lift our TP to Rs 1,138, implying 1.7% potential downside from current levels. We value the stock using a 38x target multiple.

Q1FY18 results: a strong beat
Above or below estimates:HUVR’s Q1FY18 results exceeded both Nomura and Bloomberg consensus estimates at the revenue, Ebitda and PAT levels. While we expected flattish revenue, the company delivered 5.2% growth for the quarter, with 170 bp Ebitda margin expansion, contrary to our expectation of a modest 30 bp expansion. This led to Ebitda beating our estimate by 12.6%.
What do the results mean? A strong set of numbers, in our view. Despite the impact of destocking ahead of GST implementation, delivering flattish volumes highlights the strong core business momentum. Moreover, pricing action which is clearly visible through gross margin expansion, along with cost saving initiatives which helped Ebitda margins expand, should be taken positively. However, we see this recovery largely priced in with the recent stock price rally.
Increase target price to Rs 1,138; maintain Neutral: Following the changes to our earnings estimates, we retain our target multiple of 38x for the stock to arrive at our TP of Rs 1,138, implying 1.7% downside from current levels. Our target price changes primarily as we roll-forward to Q1FY20F and our increased earnings estimates.
We see the stock trading at 36x-40x: HUL has run up 40.3% YTD, which we believe is due to two key reasons: (i) HUL will be a key beneficiary of GST; (ii) expectations of a recovery in consumer demand in H1FY18F. We estimate an EPS CAGR of 18% to FY20F; however, we expect growth levels to taper down beyond this as category penetration stabilises and competition in this space heats up. Given this, we expect the stock to trade between 36x and 40x. At our revised EPS estimates, the stock trades at a P/E multiple of 40.7x FY19F EPS of Rs 28.4, close to 2SD above its LT average. At these levels, we see limited upside; therefore we maintain our Neutral rating. Our top picks in the Household and Personal Care segments are Emami and Dabur.

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