Wholesale in the south and west regions has returned to normative levels. Other parts are still lagging, though. Cash and Carry is picking up some slack from the slowdown in wholesale. For July sales, offline reconciliation on GST has been done with all leading distributors. It will take until October for complete reconciliation. The Canteen Stores Department (CSD) is going through a transformation on checks and balances. Thus, up-stocking has not yet happened. Sales are not completely normal even now from this channel. Rural demand is expected to improve gradually. Early to call out now. There have been clear signs of pressure on small players; expect market share improvement for organised and larger players with direct reach. Turnover will reset downward because of passing on of GST benefits. Multiple cost lines items of P&L will benefit from input credits. These have also been passed on.
Absolute EBIT and EBITDA will not change on GST accounting, but margins will be higher. Management will explain GST accounting-related impact in detail post 2QFY18 results. No significant price changes in the quarter. Input costs for items like palm oil and crude-led raw materials have been moving up, but not worryingly so.
Competitive intensity on advertising is not low. HUL did not call out their advertising levels. Lever Ayush outside south India has progressed well in terms of distribution in the first couple of months of launch. Too early to call out response on demand. We expect HUVR to report 18% PAT CAGR over FY17-19, as against 6.1% in the last three years, 10.6% in the last five years and 10.7% in the last 10 years.
While valuations are not cheap at 45.2x FY19E EPS (given potentially strong earnings growth), we believe premium valuations are justified, particularly as return ratios and dividend yield remain best-of-breed. We maintain our ‘Buy’ rating on the stock with a target price of `1,400.