Buy Hindustan Unilever - Has came off highs on negative news flow - Prabhudas Lilladher

HUVR came of highs declined by ~25% from its 52-week high due to spate of negative news like 1) steady decline in volume growth to a 13-quarter low 2) end of margin catch-up phase in Soaps and Detergents 3) likely increase in tax rates by 550bps over FY13-15 and 4) 125% increase in royalty by March 2018

Expect volume growth to recover from Q3 lows: We expect gradual volume growth pick-up in the coming quarters led by 1) continued buoyancy in rural areas 2) stabilization in FAL 3) benefits of consumer activations and promotions in Detergents & Soaps and new launch and renovations in Skin, Oral care and Personal wash.

Competitive intensity rising but not alarming: Competitive intensity is rising in select product segments like Detergents, Dish Wash, Oral care and Soaps. Although HUL and Reckitt are locked in price war in the Dishwash category, we see it as an one-time event with no major threat to the profitability of the company.

Input costs mixed; PFAD prices decline 50% from the peak: Input costs are mixed with LAB prices sustaining near-recent highs and Tea prices also remain firm. ~50% decline in PFAD prices from its peak will support margins despite increase in consumer offers and promotions in Soaps. PFAD accounts for ~20% of total raw material costs.

EBITDA growth to sustain in mid-teens despite royalty increase: We expect HUVR to sustain 17% EBITDA growth over FY13-15 led by 120bps increase in gross margins and 90bps increase in EBITDA margins. We believe premiumisation, efficiency in operations and benign input costs will enable offset 50bps increase in royalty in FY14 and 30bps in FY15.

Downside limited; 'BUY' with a target of Rs505: We believe that all the negatives are already priced in. 2.5% dividend yield and healthy EBITDA growth will support valuations despite mid single-digit PAT growth in FY14. We value HUVR at long term P/E of 27xFY15 earnings and arrive at a target of Rs505. BUY

Source : Equity Bulls

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