Hindustan Unilever - Well placed to beat slowdown - HDFC Securities

Brand creator credited with transforming Vaseline from heel cream to body lotion we expect HUL to be foremost beneficiary of premiumisation. This complemented by its go-to-market capability (retail reach: 6.5mn; direct reach: >2mn) gives it strong competitive advantage. Recent commissioning of R&D centre at Bangalore underscores its commitment of investing in categories of future. Personal Product (PP) likely to surpass Soap and Detergent (S&D) in contribution to revenue in next 7 years as the company launches exciting bouquet of new products. Also, a sharp correction in RM prices enlivens better earning visibility with HUL having effected most of the price hikes. Recommend OPF with TP of INR. 550/sh.

PP contribution to surpass S&D in 7 years

- PP would continue to remain crux of HUL's growth strategy as we expect PP to contribute ~41% (from current 30%) in next 7 years and surpass S&D in terms of contribution to the net revenues. This would mean higher EBITDA margins (by 150-200bps).

- This would be aided by HUL's go-to-market capability, premiumisation strategy led by product innovation and strong product pipeline.

Few concerns to keep stock under pressure

- High single digit volume growth in S&D category not structural in nature.

- PP category impacted on account of deceleration in premiumisation

- Discretionary categories (Food, water purifier) facing pressure in near term

- As per the management, tax rate to jump to 24-25% (by 200bps) in FY13 and further to marginal tax rate going ahead

Valuations : derating unlikley

- There might be near term pressure on earnings however strong growth visibility in PP (higher margins) hints at sustained higher valuation (compared to 5-year average). Also, softening in palm oil prices may benefit the gross margins in near term. At CMP, the stock is trading at 30x and 27x FY14E and FY15E respectively. We recommend OPF with one year TP of INR 550/sh (28x FY15E).

Source : Equity Bulls

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