While execution is better than for peers, headwinds make valuations rich; base business estimates down 3%; TP up to Rs 1,820.
Hindustan Unilever (huvr) Q4FY19 sales (up 9.3% y-o-y), Ebitda (up 13.3% y-o-y) and PAT (12.8% y-o-y) came broadly in line with our estimates. Though 7% y-o-y volume growth on a high base of 11% y-o-y was a positive surprise amidst softer volumes reported by other FMCG companies, the pace of margin expansion was a tad below. Given rural demand slowdown in near term and slower pace of margin expansion going ahead, valuation remains rich at 45x FY21 PE. Maintain Hold.
Home care: Home care sustained double digit growth run with 12.9% y-o-y growth led by detergents and household care. Ebit margin in this segment was up 120bps y-o-y.
Beauty and personal care: This segment saw growth of 7.3% y-o-y impacted by softer growth in popular segment of personal wash. Margins in this segment improved 26bps y-o-y.
Food and Refreshment: F&G segment saw growth of 10.4% y-o-y in Q4FY19 helped by strong show in icecream portfolio and WIMI strategy in beverages. Margins in this segment improved by 146bps y-o-y.
Margins: HUVR’s gross margin dipped 27bps y-o-y, though Ebitda margin improved by 83bps y-o-y (ninth consecutive quarter of margin expansion). Margin improvement was led by 35bps y-o-y, 63bps y-o-y and 11bps y-o-y saving in staff costs, ad spends and other expenses respectively.
Conference call highlights: Demand has seen some moderation led by tapering of rural growth. Lux and Lifebuoy saw soft growth. Close Up and Lever Ayush toothpaste is witnessing improvement while Pepsodent is still soft. Higher receivables are due to payments due from CSD channel. HUVR brought the Simple skin care brand from UK in the premium skin care segment.
Estimates: We cut our estimates in the base business by 3%; however we incorporate GSK Consumer acquisition in our number for FY20 (for 2 months) and FY21. We are 5% below consensus on FY20/FY21 EPS.
TP and view: HUVR continues to deliver steady and superior execution than most peers. However, on absolute basis valuations are rich (54x FY20 PE and 45x FY21x PE) and leave limited upside in context of slowing rural demand and the margin expansion story having largely played out. Maintain Hold with revised price target of Rs 1,820 (still based on 47x FY21 PE).