Add Hindustan Unilever For Target Price Of Rs 2,750: ICICI Securities

The brokerage firm ICICI Securities has given an "Add" rating to Hindustan Unilever Limited (HUL), a large-cap FMCG sector company in India. The brokerage maintained Add rating with a target price of Rs 2,750 apiece. Considering the estimated target price if an investor buys the stock of the company at the Current Market Price (CMP), they are likely to get 6% potential gains.

Stock Outlook

On NSE, the Current Market Price (CMP) of HUL is Rs 2,600.60 apiece. The stock's 52-week low is Rs 1,901.55 apiece recorded on 8 March 2022, and the 52-week high is Rs 2,859.30 apiece recorded on 21 September 2021, respectively.

Returns on Investments

The stock over the past 1 week has given a 0.96% of positive return. Whereas, in the past 1 month, it gave a 1.69% negative return. In the past 3 months, it has given a 13.47% positive return. Over the past 1 year, it gave a negative return of 6%. The stock in the past 3 years gave a return of 42.13% and in the past 5 years, it gave a multibagger return of 115.78%, respectively.

Health Food Drinks (HFD) category continues to be impacted by external reasons while HUL continues to build the platform for growth once market situation improves

Top line growth in HFD portfolio over last couple of years has been largely dragged down due to 1) covid impacting consumption as there were options / time to give other alternatives as children were at home and 2) cost of a cup of Horlicks with milk which was Rs12 earlier is now Rs18 (steep inflation of +50%). This led to decline in market volumes for HFD category. However, market development activities continue leading to penetration gains for HUL in this category.

HUL continues to focus on 1) market development - 10-12mn households visits every quarter to explain the product and induce trials, 2) expanding the Plus range, and 3) food equivalence communication. As per management, better affordability with easing inflation pressure should drive improvement in category performance.

Gross margins continue to be materially margin accretive despite price cuts in Nutrition portfolio.

Significant opportunity of upgradation and market development

For example, in terms of volume, ~60-70% and ~40-50% of laundry and tea category are at the mass/popular end. A lot of upgradation opportunity still exists in these categories from mass to branded and then to premium products. Strategy to upgrade consumers is to drive premiumisation on one side to drive better margins and simultaneously provide the right price-value equation on the mass product to drive upgradation.

The other important lever of growth is by consistently investing in market development of newer formats/benefit spaces like green tea, laundry liquids, etc. to generate trials and indict habits.

Market share gains in all 3 divisions, price segments and geographies

HUL has had the highest YoY market share gains in FY22 over last decade. Market share gains is in all 3 divisions, and geographies as well. Market shares gains were across mass and premium price segments.

Margin expansion to be moderate

Margin expansion is expected to be moderate going forward as per management. Margin expansion will be driven by 1) operating leverage and 2) premiumisation. Part of margin expansion will be invested back into the business to drive growth. Advertising and Promotion expenses (competitive investing) are expected to come back once gross margins return with normalisation of input cost. Media inflation continues to be there with recovery in lot of consumption categories like Autos, Ed-tech, gaming etc.

Volume vs price

Inflation needs to come down to drive volumes. Once inflation comes down, there will be balanced price and volume growth as compared to pricing led growth currently.

Two tales of recovery in personal care

Recovery in personal care is largely dependent on macroeconomic situation currently. There is a clear difference in consumption patterns across target consumer. Premium products targeting higher income consumers (Ponds, Lakme, Dove etc.) are performing well while mass products which cater to people with limited disposable incomes (Glow and Lovely) are underperforming as these are the people who are more impacted by inflation.

Likely no steep price hikes further

HUL's price increases have not been in tandem with the commodity price increase. When management sees that inflationary trend is reversing, they become more circumspect in taking further pricing in those categories to ensure the right price-value equation for consumers and to remain competitive. Management strategy is that price increases are taken taking small bites and price drops are taken in a larger bite.

Other highlights

1) High focus on product superiority (did not compromise on quality during inflationary pressure)

2) HUL now has 2x more superior products when compared to 2019.

 

Valuation and risks

Commenting on the valuation, ICICI Securities said, "Our earnings estimates are unchanged; modelling revenue / EBITDA / PAT CAGR of 12 / 13 / 13 (%) over FY22-24E. Maintain ADD rating with a DCF-based unchanged target price of Rs2,750."

According to the brokerage they key downside risks are delayed recovery in demand, sustained raw material inflation and irrational competition.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.