We had listed 13 reasons for re-rating of Hindustan Unilever (HUL) in our detailed report five months ago. The stock rallied 24% since (outperforming the FMCG index by 800 bps) to an all-time high. With softening raw material prices, recovering mobility spurring OOH & discretionary products and a strong vaccination drive, we remain positive on the stock.
We enlist 12 reasons that indicate more steam is left in the ongoing rally. In the near term, an improving portfolio mix combined with deflation in tea costs, apart from HUL’s cost control, price hikes and synergies from the GSK takeover should abate concerns on raw material inflation. Retain ‘buy’ with the highest target price (TP) on Street of Rs 3,010.
We remain positive on HUL’s ability to outgrow the market, as well as, its pricing power, underpinned by distribution expansion, deepening direct reach and product innovation initiatives. The ongoing demand shift from smaller players to HUL would continue, especially in tea and soaps. The merger of the GSK portfolio with HUL has begun to yield a revenue delta; we believe the larger story will be innovation and new products in HFD and allied categories.
We expect the FMCG major to be a key beneficiary of strong rural demand. The order situation is dynamic due to uncertainty around the pandemic; however, the company is well placed in terms of supply chain preparedness. The stock is trading at 57.1x FY23E EPS.
Some of the reasons why we expect more upside are gross margin likely to have bottomed out as tea, packaging and palm oil prices have started correcting. The strong recovery in laggard categories such as fabric wash, discretionary, OOH products and detergents, gains in market share likely to sustain and the rural growth to revive. Scaling-up in food aided by GSK ‘sachetisation’ and innovation and premiumisation likely to boost sales for HUL.
The growth potential in HUL’s segments remains attractive for decades to come. FY22 will mark a healthy and strong balance of price and volume growth. Higher mobility, consumer-relevant innovations and investments in market development will also drive recovery in HUL’s volumes.