With a contribution of 44%/47%/38% of incremental sales in FY17/18/19, Detergents continues playing a key role in driving HUVR’s overall growth (based onForm No. MGT-9 in the annual report).
However, we highlight that it is crucial to keep a close eye on competitive actions (especially from P&G) in this segment (more details in our report published in Feb’19). Separately, Soaps performance has been tepid over the past four years, although some bounce back was seen in FY19. Its third largest segment Cosmetics & Toiletries (C&T) has again started contributing significantly to overall sales in FY19 after a muted show in the preceding two years.
We believe that HUVR is likely to continue outperforming smaller players on the volumes front. We note of the emergence of four key trends that have the potential to drive an elevated earnings growth trajectory: (1) rapidly improving adaptability to market requirements, (2) recognition and strong execution on Naturals and other evolving categories, (3) continuous strong premiumization trend and (4) extensive use of technology, creating further entry barriers.
Notably, if we incorporate the GSKCH merger (no clarity on the date yet) in our estimates, then it will result in 8-9% addition to EPS in FY21, which means that the stock is trading closer to 43x FY21E EPS (v/s over 46x as it appears currently).
In our view, this valuation premium should sustain, given the company’s best earnings growth visibility in the large-cap Indian consumer space and by far the highest return ratios. On a target multiple of 50x Jun’21E EPS, we maintain our ‘buy’ rating and target price of `2,070. Hindustan Unilever Limited is a British-Dutch manufacturing company headquartered in Mumbai, India.