HUL's earnings set to double over FY15-17

Lower input costs, recovery in volumes, higher earnings likely to support rich valuations

Hindustan Unilever Ltd (HUL) is back on the radar of investors. Its earnings outlook appears better, due to lower raw material costs. The company has been battling weak volume growth for several quarters, as demand continued to fall.

However, since January, the stock is up 7.5 per cent, while the FMCG index has stayed flat. While some analysts believe the earnings upgrade cycle is set to kick off, others like Credit Suisse have already raised the company's earnings estimate, on expectation of revival in volumes and improved margin outlook.

On Monday, Credit Suisse upgraded the stock to 'Outperform', with a new price target of Rs 915, based on 35 times its December 2016 earnings. The brokerage is taking a stand against conventional wisdom that a sharp fall in input costs leads to increased competition and lower price-led growth.

Over the past 12 months, input costs have declined 35 per cent for HUL. Lower input cost is expected to give more room to invest in promotions and advertising, believe analysts. This spending has increased from 10 per cent of sales to 12.5 per cent. In addition, the company has invested heavily throughout the slowdown to build premium categories like fabric conditioners, hair conditioners and face washes.

 

Compared to a few years earlier, HUL is in a relatively stronger position on brands, positioning and distribution is concerned. Its direct distribution, too, has improved from one million to three million, allowing it to regain market share in several categories.

IIFL Institutional Equities believes HUL has launched several premium products that are now becoming significant in size, which can drive the next leg of growth. The company has relaunched its entire portfolio over the past few years, which should enable it to grow faster than peers, believe analysts. It is expected to undertake price cuts in various categories, which should enable it to boost volumes in the coming months.

According to IIFL's estimates, lower input costs and recovery in volumes should drive compounded annual earnings growth (CAGR) to 19 per cent over FY15-17. The earnings have averaged nine per cent in the past six quarters. Credit Suisse also expects a 21 per cent earnings CAGR over FY15-17, against 10 per cent over the past two years.