A store attendant sits beneath sachets of Hindustan Unilever Ltd. products, displayed for sale at a store in Mumbai, India. (Photographer: Kuni Takahashi/Bloomberg)

Here’s Why Jefferies Maintains A ‘Buy’ On Hindustan Unilever

Brokerage house Jefferies has retained a ‘Buy’ rating on Hindustan Unilever Ltd. while increasing its price target to Rs 1,320 from Rs 1,150 citing product innovation, portfolio premiumisation, and steady distribution expansion.

The broking firm said the company is well-positioned to capture the uptick in fast moving consumer goods sector, given its high rural presence, brand acceptance, and distribution strength.

The company is likely to see margin expansion as it has a competitive advantage versus rival Procter and Gamble aiding pricing power as well, Jefferies said in a note.

Post demonetisation and Goods and Services Tax implementation, wholesale-led business models have had growth issues and brands associated with higher direct distribution stand to benefit more, said Jefferies.

HUL scores well on both fronts and is expected to gain market share over next three years, it said.

Risks To Target

  • Higher competitive intensity leading to price cuts and promotions
  • Slower-than-expected volume recovery
  • Margin expansion lower than expected due to pick in input cost inflation or increase in competitive intensity by P&G and Patanjali
  • Under-investing in key brands and new product innovation, leading to market share losses

Jefferies’ Estimates

  • Volume to expand at compound annual growth rate of 6 percent
  • Revenue to grow 10 percent CAGR
  • Earnings before interest, tax, depreciation and amortisation to expand 290 basis points