Hindustan Unilever - 1QFY18 Result Update - Superior Growth Trajectory to Sustain Rich Multiples:BUY Target Price of Rs1,296

Hindustan Unilever - 1QFY18 Result Update - Superior Growth Trajectory to Sustain Rich Multiples; Upgrade to BUY

Hindustan Unilever (HUL) has reported a strong set of numbers in 1QFY18 as its net sales grew by 5.2% YoY to Rs84bn, while EBITDA and PAT (before exceptional item) surged by 14.1% YoY and 14.6% YoY, respectively. Despite flat volume growth due to overhang on account of GST rollout, revenue growth was higher due to effect of pricing action in the previous quarters. 

Continued focus on premiumization, strong new product funnel, consistent focus on cost rationalisation and higher share of organised players post GST would drive accelerated growth for HUL in coming years. We expect HUL to post revenue and earnings CAGR of 12.2% and 18%, respectively through FY17-19E. Considering the strong performance in the reporting quarter, we have increased our earnings estimate by 6% for FY19E. The stock has been trading at an average one year forward multiple of over 45x in past three years. Taking into account these factors coupled with impressive return ratios, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs1,296.

Volume Flat but Trend to Improve

Volume growth was flat, while revenue growth stood at 5.2% for the quarter. Revenue growth was led by Home Care (5.9% YoY) and Refreshments (10.8% YoY) segments. Personal products category grew by 3.5% YoY, while Foods portfolio witnessed 4.4% YoY revenue growth in the quarter. Notably, revenue growth was impacted to some extent due to GST-led inventory destocking and sharp fall in sales from CSD channel.

Strong Focus on Cost Control Yielding Results

Gross margins for the quarter rose by 90bps YoY to 51.4% on the back of price hike in past few quarters and stable input cost scenario. Continued focus on cost reduction led to reduction in all other cost heads i.e. A&P (down 20bps), employee cost (down 40bps) and other expenses (down 50bps). Thus, the resultant EBITDA margins improved 180bps YoY to 21.9%, which were the highest quarterly margins for HUL in at least past seven years.

Outlook & Valuation

We expect HUL to report revenues of Rs348.8bn and Rs394.2bn and net profit of Rs50.3bn and Rs59.1bn in FY18E and FY19E, respectively. Based on expected EPS of Rs27.4, the stock currently trades at PE multiple of 42.2x FY19E earnings. We believe that although valuations on absolute basis are rich, we expect HUL to sustain these valuations on the back of improved growth trajectory and superior return ratios compared to peers. We upgrade our recommendation on the stock to BUY from HOLD with an upwardly revised Target Price of Rs1,296, based on 45x Jun’19 earnings.