Why Analysts Remain Bullish On HUL Despite Premium Valuation

Most analysts maintained their bullish investment recommendations for Hindustan Unilever Ltd., citing the best of the acquisition of GlaxoSmithKline Consumer Healthcare Ltd. is yet to come.

India's largest consumer goods maker reported an 8% year-on-year increase in net profit to Rs 1,967 crore in the quarter ended September. Its revenue rose close to 16% and margin stood at 25.1% from 24.8% a year ago. The company's volumes, too, grew marginally after contracting in the previous two quarters.

While that prompted a few analysts to raise their target prices on the FMCG company, they cautioned that its margin may remain under pressure in the near term.

Of the 42 analysts tracking HUL, 33 have a ‘buy’ rating, eight suggest a ‘hold’ and the rest recommends a ‘sell’. The average of Bloomberg consensus 12-month target price implies an upside of 13.5%.

Here’s what brokerages have to say:

CLSA

• Maintains 'buy' rating
• Raises price target to Rs 2,600 from Rs 2,525 apiece
• Prioritising volume over margin in near term is an apt strategy to expand penetration across categories
• Should be able to uptrade customers and recoup any margin losses in the medium to long term
• Cuts FY21-23 earnings estimates by 4-5% to capture near-term headwinds like slowdown in laundry, negative sales mix and increased advertising and promotion expenses
• Long-term prospects remain bright
• Views HUL as a structural play in India's FMCG industry

Jefferies

• Maintains 'buy' rating
• Price target at Rs 2,650 a share
• A key concern is the slow trade offtake on winter portfolio pre-season
• Expect 14% annual revenue growth over FY20-23 as the base case with a 180 basis point improvement in Ebitda margin
• Overall EPS growth seen stronger at ~17% CAGR over FY20-23 due to GSK Merger
• Upside scenario price target of Rs 3,250
• Downside scenario price target of Rs 1,500

UBS

• Maintains 'buy' rating
• Price target at Rs 2,700 a share
• Q2 trends reflect improvement in core business
• Best of the GSK portfolio is yet to come
• Channel dominance should enable it to recover faster than peers
• Among the most future-ready companies given digital investments made in back-end and front-end and the scale of the business
• Deserves to trade at a premium valuation

IDBI Capital

• Upgrade to buy from accumulate
• Price target raised to Rs 2,677 from Rs 2,423
• Health, hygiene and nutrition drives topline growth
• Gross margins may remain under pressure in the near-term
• Lower ad spends help Ebitda margin expansion
• Cut FY21E EPS estimates by 4%
• See EPS CAGR of 16% over FY20-23E

Prabhudas Lilladher

• Upgrades to 'buy' from 'hold'
• Hikes price target to Rs 2,502 from Rs 2,254 apiece
• Upgrade due to strong growth and margin outlook
• Colour cosmetics and deo will see a delayed recovery
• Any meaningful gains in sales growth from GSK integration will accrue from Q4
• Near-term margin outlook remains challenging
• Remains structurally positive given its strategy around emerging categories, increasing distribution and strength in supply chain
• Sees Ebitda CAGR of 15.9% over FY20-23
• Cuts EPS estimates by 2-4% on higher dividend payout and lower interest on surplus funds

Motilal Oswal

• Maintains 'buy' rating
• Cuts price target to Rs 2,620 from Rs 2,670 apiece
• Discretionary part of the portfolio is seeing gradual recovery
• Robust earnings growth potential beyond the near term owing to portfolio and execution strength
• GSK merger expected to bring significant synergies in FY22
• Outlook is improving; likely to post superior earnings growth
• Structural and near-term investment case remains strong

Emkay

• Maintains 'hold' rating
• Cuts price target to Rs 2,250 from Rs 2,300 apiece
• Gross margins likely to remain under pressure due to high input inflation
• Near-term margin outlook is muted despite control on ad spends, GSK synergies and cost savings
• Discretionary portfolio will see further recovery but will likely impact growth and margins in the medium-term
• GSK integration benefits appear largely priced-in
• Reduces FY21-23 earnings by 3-5% to factor in muted performance of the base business
• At current valuations, stock offers limited upside

Dolat Capital

• Maintains 'reduce' rating
• Price target of Rs 2,320
• Discretionary will take longer to normalise
• Segmental performance a mixed bag
• Demand would normalise for majority of the portfolio over the next couple of quarters
• Will continue to trade at rich valuations due to high market share and market share gains in most categories
• Valuation gap with peers will remain sizeable