After a 30% rally, can HUL rerate further? Here is what analysts say

NEW DELHI: Hindustan Unilever () has been demonstrating meaningful improvement in long-term planning and execution and digital capabilities, analysts who attended the FMCG major’s Investor Day on September 10 said.

These capabilities would not only help the FMCG major widen its lead over competition but also help it report industry leading volume growth, analysts said.

Given the scope of premiumisation in product categories, cost-saving initiatives, focus on acquiring digital capabilities and the management commentary on double-digit growth in earnings, most brokerages said the stock could rise up to 20 per cent over the next 12 months. Some, who see the likelihood of near-term pressure on margins, were not much comfortable with the prevailing valuations, especially after a 30 per cent rally on the counter since its February lows.

Antique Stock Broking’s Rs 3,337 was among the most bullish targets on the stock, suggesting a 20 per cent upside. In contrast, ‘s Rs 2,530 target suggested a potential 9 per cent downside.

At 1.30 pm, the scrip was trading at Rs 2,791 a piece, down 0.63 per cent.

“HUL remains a high-quality business — the only argument to be had perhaps is whether one believes that over 60 times forward PE ratio can move further up or it scales back closer to mean level,” said JM Financial.

Motilal Oswal Securities has set a target of Rs 3,280, Edelweiss Rs 3,010, Investec Rs 2,987, Nirmal Bang Rs 2,940 and Prabhudas Lilladher at Rs 2,915. Emkay has a target of Rs 2,700.

Management commentary
HUL recorded a sales growth of 9 per cent annually in the last decade. It expanded its margin in excess of 1,000 basis points or 10 percentage points during this period. The FMCG major said its earnings per share (EPS) would grow in double-digit in the coming decade, albeit with a “modest” margin expansion. In FY21, HUL gained market share in 84 per cent of its portfolio. According to the management, the company now has 14 brands with over Rs 1,000 crore in annual sales compared with 12 brands in FY20.

Digital capability
HUL’s sales from digital medium, at 10 per cent, has been the highest among peers. The FMCG major said it has installed a small prefabricated manufacturing unit within a full-sized factory, enabling significantly faster production of niche small-batch e-commerce products.

The company has invested in direct-to-consumer Ushop, an HUL product website that it runs in Mumbai and Delhi-NCR. It now also owns an app, Shikhar, for retailers. Besides, the FMCG major has made investments in digital platforms and brands such as Simple, Love Beauty Planet and Dermologica.

Analysts said initiatives like these made HUL more “future-fit”.

“We expect HUL’s enhanced digital capabilities to widen its competitive lead against peers, and believe it is taking the right steps to succeed in the emerging segment of D2C/digital-first products. HUL continues to gain market share in over 75 per cent of its businesses,” Nomura India said.

Scope for premiumisation
The company is looking to drive sales growth through premiumisation and focus on new categories. At present, the beauty and personal care segment accounts for 40 per cent of sales; home care for 31 per cent and food & refreshment the rest 29 per cent.

Analysts noted that the beauty segment has seen 70 per cent increase in sales and has sustained 29 per cent margins but has been unable to live upto expectations in the past decade. For this, HUL has identified new segments like body wash, skin and hair serums to give this portfolio a lift. It has also launched e-commerce channel products such as sheet masks, skin creams and hair masks to strengthen its digital portfolio in this segment, said Prabhudas Lilladher.

Thanks to a turnaround in Surf Excel, HUL’s revenues jumped 2.3 times in the last decade. The segment enjoys margins of 20 per cent today, against high single-digit margins during the days of price wars. Analysts said there was scope of premiumisation in laundry products. In the food & refreshment segment, soups, protein powders, premium spices and green tea offered scope, they added.

Investec said while the near-term margins would stay in a band, a strong rebound was likely in FY23 as commodity pressures would abate and product mix normalise. “The recent rise in the stock price limits near-term upsides; however, we maintain our positive longer term outlook on HUL given strong historical execution and renewed longer term earnings visibility,” it added.

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