HUL share price: CLSA to UBS, know if Hindustan Unilever is a money-making opportunity for you
Hindustan Unilever (HUL) reported in-line 2Q financials with 16% top-line growth and 3% organic growth (with 1% volume growth) YoY.
HUL share price: Hindustan Unilever (HUL) reported in-line 2Q financials with 16% top-line growth and 3% organic growth (with 1% volume growth) YoY. While CLSA maintains buy rating on HUL and raises target price to Rs 2600 from Rs 2525 (20% potential upside), UBS highlights HUL’s domestic consumer business showed significant improvement and grew 3% YoY after two quarters of negative growth. Motilal Oswal thinks HUL numbers are significantly better than the corresponding Q1 FY21 numbers with outlook becoming better going forward. Kotak Institutional Equities believes Hindustan Unilever results are tad soft but are on expected lines. CLSA continues to see HUL as a structural play in Indian fast-moving consumer goods.
Category penetration strategy; expected long-term benefits:
Hindustan Unilever (HUL) reported in-line 2Q financials with 16% top-line growth and 3% organic growth (with 1% volume growth) YoY. HUL is prioritising volume over margin in the near term; CLSA considers this an apt strategy to expand penetration across categories. HUL should be able to uptrade consumers and recoup any margin losses during the medium to long term. Capturing near-term headwinds such as a slowdown in laundry, negative sales mix, increased advertising and promotion (A&P) to support and revive part of the portfolio, and inflation, CLSA cuts FY21-23 earnings estimates 4-5%.
HUL Q2 FY21 performance strained by multiple headwinds
HUL Q2 FY21 results were in line with our expectations. Organic business revenue grew 3% with 1% volume growth YoY. Realisation improvement mainly reflects lower trade promotion and tea price hikes. Following negative sales mix (consumer downtrading), weak laundry business (restricted usage in confined living), inflationary raw material trends and a need for higher advertisement spending, organic business registered 60 bps margin contraction YoY. The acquired nutrition business was flat YoY, hindered by supply issues. Overall revenue and EBITDA grew 16% and 18% (about 30 bps operating profit margin expansion to 24%, aided by the nutrition portfolio) YoY in Q2.
Key improvements for HUL during the pandemic
While the operating environment was strained in first half, CLSA sees many positives for HUL:
a) Revival of personal wash with Lifebuoy and Lux (a key concern for Unilever)
b) Recovery in oral care (double-digit YoY growth in 2Q)
c) An accelerated push for supply chain digitisation (Covid-19 accelerated adoption)
d) Market share gains in tea
e) Nutrition business takeover
f) Ecommerce sales doubling to 6%
Long-term prospects remain bright; maintain Buy rating on HUL share
Given long-term category and country potential and management actions to accelerate growth, CLSA remains structurally positive on HUL, given a favourable portfolio mix, better execution, and upside from the acquired nutrition business. However, the near term is likely to be strained due to weak mix and a slowdown in laundry, increased A&P spending, and raw material inflation. CLSA cuts FY21-23 topline expectations 2% each to reflect near-term demand in laundry and a slower than-expected nutrition business ramp-up. Along with margin estimate adjustments based on weak mix, this led to 4-5% cuts in our FY21-23 earnings expectations.
UBS maintains buy on HUL with a price target of Rs 2700. They say HUL’s domestic consumer business showed significant improvement and grew 3% YoY after two quarters of negative growth.
Key trends to highlights:
1) Rural growth resilient while the near term urban outlook remains uncertain, sequential improvement in urban categories should augur well.
2) Gross margins likely to remain under pressure.
3) Focus on volume led growth going forward
4) Distributors still cautious about hoarding inventory
HUL’s standalone revenue grew 16.1% YoY aided by GSK consumers portfolio of nutrition drinks. Higher raw material prices (palm oil and tea) were offset by reduction in ad-spends, resulting in EBITDA margin expansion of 28 bps points. Management in a conference call indicated GSK’s performance could have been even better. HUL access to GSK’s chemist channel and GSK’s product portfolio will also get huge benefit from HUL’s wider distribution reach. Benefits of merger synergies with GSK should fully materialise in 2nd half of FY21.
UBS believes HUL deserves premium valuation because of following reasons:
1) Channel dominance should enable it to recover faster than peers.
2) The cost focus and agility demonstrated should benefit minority shareholders.
3) HUL will benefit from digital investments made in back-end and front-end and the unbeatable scale of the business.
Antique maintains buy rating on HUL, revised target to Rs 2629 from earlier target of Rs 2431.
Hindustan Unilever's (HUL) Q2 FY21 revenue was slightly below expectations due to continued drop in fabric wash and flat sales of nutrition business. Going ahead, Antique believes that nutrition business will revive due to restoration in manufacturing operations. However, concerns on recovery in fabric wash may remain, as premiumization in the category could witness a slowdown in the medium term and is a key factor to be observed. Notably, personal care has been witnessing QoQ improvement. A pick up in winter products may aid performance. Most importantly, after almost 3 quarters, the management has turned cautiously optimistic on its revenue performance in the coming quarters. The management will restrict EBITDA margin erosion despite pressure on gross margin and expected increase in ad-spends. In view of underperformance Antique have reduced our EPS forecast for FY21e and FY22e by 3.5% and 6.5% respectively.
Motial Oswal believes outlook is improving for Hindustan Unilever (HUL); Maintains HUL as their top pick in FMCG sector. In Q2 FY21, 80% of Hindustan Unilever’s (HUL’s) portfolio grew 10% while discretionary categories (15% of portfolio) declined 25% and out-of-home categories (5% of sales) also declined 25% YoY. These numbers are significantly better than the corresponding Q1 FY21 numbers with outlook becoming better going forward.
HUL did well to grow EBITDA margins (including GSK Consumer) by 30 bp YoY and restrict like-for-like margin decline to only 60 bp YoY despite
(a) Faster rebound in ad spends (-5% YoY)
(b) Sharp increase in palm oil costs
(c) Mix deterioration
Margin outlook is better going forward as the share of discretionary portfolio will increase sequentially.
See Zee Business Live TV Streaming Below:
Motilal Oswal remains positive on HUL encouraged by:
(a) Robust earnings growth potential owing to its portfolio and execution strengths
(b) Significant synergies in FY22E as a result of GSK Consumer.
Kotak Institutional Equities believes Hindustan Unilever results are tad soft but on expected lines. Q2 FY21 headline numbers are in line with expectations. Segmental performance has witnessed some hits and some misses. They trim FY 2021 - 23 EPS estimates by 1-4%, with a target of Rs 2,500.
(Authored by Rahul Kamdar)
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.