Hindustan Unilever - Valuations capture buoyancy - Antique

Key beneficiary of the rural demand growth backed by its distribution expansion

Backed by its wide spread distribution and increase in direct reach, HUL would be the key beneficiary of the rising demand for branded products in rural India. The company has gained to a large extent from the buoyancy in rural consumption supported by increase in direct distribution. During the last two years, the company has increased its direct distribution from about 1mn outlets to about 1.6m outlets.

Limited room for positive surprises in soaps and detergents

We see limited scope for surprises on the profitability front going ahead, which would be primarily driven by soap and detergent margins (assuming personal product margins to remain stable at 25.4%). Our scenario analysis based on diverse levels of PBIT margins in soaps and detergents and attracting different levels of PE multiples, provides a target price of INR524 in the base case (most likely), INR664 in the bull case and INR422 in the bear case (most unlikely). We believe that in the base case, soap and detergent margins would touch 14.1% during FY14e leading to a CAGR growth in earnings of 19% to INR37.8bn(EPS-INR17.5). In this scenario, the stock would trade at 30x FY14e. In the bull case, PBIT margins of soaps and detergents would touch 16.5% by FY14e and would lead to an earnings growth of 22% CAGR to INR39.5bn (EPS - INR18.3). In the bull case, the stock could get re-rated to its CY00 PE multiples of 36.3x.

Valuations close to HUL's peak multiples of CY06

Hindustan Unilever has witnessed a re-rating every 6 years during CY00/FY01, CY06/ FY07 and now during FY13. During CY00, the stock traded at an average PE multiple of 36.3x while during CY06 the stock witnessed a re-rating to an average PE multiple of 31.5x. During CY00, the stock re-rating was led by a sharp improvement in profitability (EBITDA margin) during CY2000 to 13.8% from about 10% during CY98 (which were broadly the margins during CY1995 to CY1998). The sharp improvement in profitability continued during the next three years to touch about 19.6% in CY04. We believe that HUL has witnessed a similar re-rating in the stock valuations during FY13, after almost 6 years, when the company has witnessed an improvement in performance since FY12 led by recovery in margins of soaps and detergents from the trough levels of FY11.

Valuation

At the CMP of INR574, the stock is trading at 38.1x FY13e and 32.9x FY14e. At the current levels, we believe a majority of the valuation re-rating is factored in the stock valuations and hence we recommend a HOLD. We continue to be optimistic about the performance of the company led by distribution gains, broad based focus across categories and a favorable pricing scenario. However even after factoring in the positive scenario, the stock is richly valued.

Source : Equity Bulls

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