We spoke to the management of Hindustan Unilever (HUVR) for an update on the overall market condition. Key takeaways: Demand environment showing no signs of improvement. It is similar to the last quarter with no major improvement or deterioration. Rural demand has seen slight sequential slowdown. The company doesn’t see sharp demand turnaround for another two quarters.
Rising raw material cost in a weak environment: Since Oct’19, palm oil prices have started inflating and the company will view its implication on a blended basis. However, the company believes that it’s too early currently to decide on a price increase.
The company took the balance 3% price cut in Oct’19, as guided in its 2QFY20 management commentary.
Premiumisation trend continuing: HUVR has seen no major downtrading during the quarter. Premiumisation as a trend is continuing. Further, premium as a proportion of overall sales is holding up decently.
Other pointers: The company is seeing slight sequential improvement in channel liquidity and is offering some credit wherever required. HUVR is seeing nothing extraordinary in ad-spends or competitive intensity.
Valuation and view: Four key trends are particularly relevant to HUVR as they point toward an elevated earnings growth trajectory compared to the past. These include rapidly improving adaptability to market requirements, recognition and strong execution of the Naturals segment, a continuous strong trend toward premiumisation, and (d) extensive plans to employ technology, creating further entry barriers.
Once we incorporate the GSKCH merger (no clarity on the date yet), there could be 8-9% addition to EPS in FY21, which means that the stock trades at ~45.1x FY21E v/s 49.1x as it appears now.
Given HUVR’s best earnings growth visibility in the Indian large-cap consumer space and by far the highest return ratios, we believe that the premium valuations are justified. On a target multiple of 50x December’21E EPS, we derive a TP of Rs. 2,378/share.