Analyst Corner: Maintain ‘buy’ on Hindustan Unilever with TP of Rs 2,780

Whereas 1QFY22 can be impacted by the second Covid wave, the extent can be farn decrease in comparison with final 12 months.

We interacted with the administration of Hindustan Unilever (HUVR) for an replace on general market circumstances. Listed here are the important thing takeaways:

Macro surroundings and gross sales channels: With numerous components of India progressively opening up, the administration believes the impression from the second Covid wave would have peaked in Could’21 and issues will progressively get higher. The outlook from Jun’21 onwards is optimistic, barring the emergence of a 3rd Covid wave. The rise in retailer working hours can also be a optimistic growth. Rural continues to do higher than city, regardless of experiencing a better impression from the pandemic in 1QFY22 v/s final 12 months. Prediction of a standard monsoon, good Rabi harvest, favourably timed kharif sowing, and MNREGA present potential help as properly. The fashionable commerce (MT) channel was affected.

Segmental demand tendencies: There was a decrease quantity of pantry stocking as the supply of necessities was ensured. Preventive measures like hand washing and a concentrate on hygiene amongst customers continues to be seen. Hygiene and in-home classes (80% of HUVR’s portfolio) proceed ton witness wholesome demand. Demand for discretionary merchandise was impacted as city and MT gross sales, which had normalized in 4QFY21, had been affected from the second half of Apr’21 until the tip of Could’21. The impression although is lesser than final 12 months. The administration stated there could be some impression on the gross sales of GSKCH merchandise because of momentary destocking on account of distributor integration, which began on the finish of Mar’21.

Prices and margin: Whereas there was some softening of palm oil costs within the final two weeks, Apr’21 and Could’21 continued to witness RM inflation. Crude and tea costs have risen sequentially. Within the case of tea, there’s hope that the brand new crop, because of arrive in Jul’21, will result in a softening of costs. HUVR has taken additional worth will increase in soaps, detergents, residence merchandise, and tea in 1QFY22. With some impression on discretionary demand sequentially (albeit higher than 1QFY21), additional RM inflation, and elevated promoting spends, EBITDA margin can be underneath stress in 1QFY22.

Valuation and think about: Whereas 1QFY22 can be impacted by the second Covid wave, the extent can be far decrease in comparison with final 12 months. Rural continues to stay resilient, and demand in Well being, Hygiene, and Diet classes stays wholesome. Whereas discretionary demand can be affected, we count on the impression to be decrease YoY. EBITDA margin is more likely to stay underneath stress owing to sequential RM inflation and better A&P spends.

From a medium-term perspective, the outlook stays optimistic. Progress in earnings has gained additional momentum in recent times (~18% EPS CAGR within the 4 years ended FY20 v/s ~12% CAGR over the ten years ended FY20). Regardless of a extremely disruptive 12 months, HUVR posted an EPS development of 11.5% in FY21. That is significantly spectacular given the weak mid-single-digit earnings development posted by (a lot smaller) friends in recent times.

We keep our Purchase ranking with a TP of Rs 2,780 per share.