We interacted with Hindustan Unilever’s (HUVR’s) management to get an update on the market conditions. Key takeaways: Slowdown seen in the last quarter has continued into Q4FY20 with many categories reporting flattish sequential growth. In fact, some personal care categories are reporting de-growth. Rural continues growing at 0.5x urban growth.

Uptick across skin cleansing products recently: Over recent days, HUVR has witnessed strong growth not just in hand washes but also in soaps, which had otherwise shown a disappointing trend in the first two months of the quarter.

Customers also bought other products more last week: Offtake from retail stores was higher last week in household care products like detergents, floor and toilet cleaners. Unlike soaps and hand washes, higher sales for these products this quarter could affect demand for Q1FY20.

Disruptions in channel due to corona virus outbreak: So far, it is business as usual, but the more the restrictions on movement of people the more it would cause disruption in business. Technology though could limit the impact. Government decision on closure of retail shops on alternate days, if prolonged, could impact demand over the next few weeks.

GSKCH merger: GSKCH likely to be merged from 1st Apr’20 and the ongoing disruptions are unlikely to change the timing of the merger. Valuation and view: Despite the near-term demand blip, earnings CAGR for the next two years is likely to come in impressive at 16%. If we take the GSKCH merger into account (not in our projections yet), EPS CAGR could be even more remarkable at ~22% over FY20-22. This provides comfort on HUVR maintaining its stupendous wealth-generation track record and outperformance versus smaller peers.

Moreover, we see an upside risk to our operating margin expansion forecast of 50bp/50bp for FY21/22 if the factors driving HUVR’s strong earnings growth continue contributing as before. This is not unlikely given the past five years’ Ebitda margin expansion of 830bp. With best-of-breed earnings growth and far-superior RoE compared to peers, we maintain our target multiple of 50x FY22e EPS on the merged numbers, resulting in a TP of Rs 2,425 (32% upside). Maintain Buy.