HUL: Earnings upgrade kicks off as input costs dip & demand stays strong

Reports revenue growth of 12% in first half of FY15, while sector struggles with single-digit growth

Hindustan Unilever (HUL) has not been a top pick of analysts because of rich valuations in the face of slowing growth. However, they are now coming to the view that the company will continue to command premium valuations as it is growing ahead of the pack. In the first six months of FY15, the sector has grown five-six per cent in terms of revenues, while HUL has posted 12 per cent growth. The double-digit growth has been driven by a broad range of segments and not just one or two categories.

Analysts are bullish again on the stock as there is potential for strong growth in several categories where the company has a sizable presence. In the face of slowing economic growth, demand for personal care products and food decline, but in the first half of the financial year, HUL has reported strong growth in these categories as brands such as Fair & Lovely, Lakme, Clinic Plus, Dove, Kissan and Knorr have grown at a healthy pace. According to Prabhudas Lilladher, “Consumer demand is directionally positive from the past two-three months in both rural and urban India. Winter has been very weak and could drag sales growth.” While the brokerage is maintaining its earnings per share target for FY16 and FY17, it expects single-digit upgrades once uncertainty over crude prices ends.

Thanks to the sharp fall in costs, inputs such as palm fatty acid distillate and soda ash, the company is looking at de-stocking expensive inventory and before cutting price. Analysts expect competitive intensity to increase as input costs fall and advertising-promotion spends to increase. If input costs sustain at lower levels, analysts expect earnings to improve by 6-10 per cent.

Lower input costs and a secular uptick in demand is expected to give a boost to the bottom line. According to Emkay Global, operating margins have gradually risen from 15 per cent in FY12 to 16 per cent in FY14, driven by efforts on overheads management (materials. manufacturing, distribution and supply chain), coupled with a better product mix and smart pricing strategy. “These efforts should drive earnings before interest, taxes, depreciation, and amortisation margins to 17 per cent in FY15 itself and sustenance thereafter,” the brokerage said.