HUL rating: Retain ‘buy’ with target price of Rs 2,665

Published: July 23, 2020 5:10 AM

Beauty and personal care segment has been hit the hardest — slumped 12% yoy with sharp decline in hair, skin and cosmetics part of the portfolio, while Lifebuoy posted double-digit growth.

Overall, going ahead, we remain confident of margin expansion owing to HUL’s cost savings programmes and synergies from the GSK acquisition. Maintain ‘buy’ with target price of Rs 2,665.Overall, going ahead, we remain confident of margin expansion owing to HUL’s cost savings programmes and synergies from the GSK acquisition. Maintain ‘buy’ with target price of Rs 2,665.

By Edelweiss Securities

Hindustan Unilever’s (HUL’s) Q1FY21 net sales (up 4.4% year on year), ebitda (flat yoy) and PAT (up 7.2% yoy) surpassed our estimates. On comparable basis, domestic revenue dipped 7% yoy. Domestic volumes benefited about 6% from trade pipeline restocking. However, it still fell 8% yoy on a base of 5%. Despite Covid-19 turmoil, company gained 5% market share in 80% of its portfolio. With impact on high-margin business (BPC), gross margin took a 233 bps year-on-year hit. However, sharp cut in ad spends (down 397bps yoy) aided ebitda margin a tad (down 110 bps yoy). Even in such a tough economic environment, HUL has announced an interim (special) dividend of Rs 9.5 per share for FY21. Overall, going ahead, we remain confident of margin expansion owing to HUL’s cost savings programmes and synergies from the GSK acquisition. Maintain ‘buy’ with target price of Rs 2,665.

The home care segment fell 2.1% yoy primarily due to severe impact on the purifier business. Beauty and personal care segment has been hit the hardest — slumped 12% yoy with sharp decline in hair, skin and cosmetics part of the portfolio, while Lifebuoy posted double-digit growth. Foods & refreshments’ revenue jumped 51.7% yoy (including GSK business) with nutrition, tea and coffee delivering good performance.

Overall, 80% of the portfolio (health, hygiene & nutrition) grew 6% yoy while 15% of the portfolio (discretionary) declined 45% yoy and 5% of the portfolio (ice creams and out-of-home consumption) fell 69% yoy.

Company rationalised some trade spends and hence the difference between value and volume. No major price hikes taken during the quarter. Localised lockdowns are putting pressure on normalcy of business. On comparable basis, HUL saw 170 bps y-o-y ebitda margin compression. There was, however, benefit of 60bps from the GSK portfolio.

We expect HUL to be a key beneficiary of the rural demand recovery. Although the Covid-19-induced lockdown will affect near-term volumes, we expect volumes and earnings to bounce back once things normalise. We retain ‘buy/so’ with TP of Rs 2,665. At CMP, the stock is trading at 56.5x FY22E EPS.

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