Analysts see 20% upside in this FMCG stock on strong outlook, product mix

Hindustan Unilever's (HUL's) focus on cost saving and superior products would lead to moderate margin expansion, say analysts

After rallying over 20 per cent since the beginning of August to hit a new high last Monday, twice the 10 per cent rise in the benchmark Sensex, shares of Hindustan Unilever (HUL) have taken a breather. Analysts, however, are bullish and expect the stock to rise further. While many see at least a single-digit rise, some are predicting up to 20 per cent gains from current levels of Rs 2,785, deriving comfort from the company’s long-term growth strategies, along with increase in prices to protect margins.
 
That said, a scale back of 180-230 basis points (bps) in the medium-term margin-synergies target for the nutrition business could be an overhang, they say. Overall, of the 20 analysts that have come out with a recommendation on HUL after its annual investor meet on September 9, 17 have a ‘buy/add/accumulate/outperform’ rating, while three recommend ‘hold’.
 
Here’s what some brokerages say regarding HUL:
 
Antique Stock Broking
 HUL has successfully integrated the back-end system of GSK (GSK Consumer Healthcare) portfolio (health food drinks, or HFD) and is on track to integrate the distribution chain by the end of 2021, the brokerage said. The successful integration of the distribution chain would expand HFD’s direct distribution reach by 2x and village coverage by 10x. Notably, the synergy benefits from integrating the distribution and supply chain would drive 300-400 bps of margin expansion.
 
Further, HUL has hiked prices in skin cleansing, fabric care and tea to mitigate input cost inflation. Also, pickup in discretionary categories (high-margin products) during the festive season would help maintain 24-25 per cent margin in the near term, the brokerage added. Over the long term, HUL’s focus on cost saving and synergy benefits from the nutrition segment would lead to moderate margin expansion.
 
Motilal Oswal Securities
 In the past decade, HUL’s sales have seen a compound annual growth rate of 9 per cent and Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins have expanded 1,000 bps. This was despite disruptions like weak rural growth in the second half of the decade, demonetisation, introduction of the goods and services tax (GST), and Covid-19, the brokerage firm said. With the long runway for growth in FMCG in India, increasing premiumisation, and synergies from GSK Consumer Health­care, we believe earnings could continue to grow at 14–15 per cent CAGR over the next 10 years.
 
Kotak Securities
 HUL continues to focus on superior products, market development, premiumisation, leading with digitisation of general trade (GT), e-commerce and modern trade, granular market-specific products and communication leveraging the winning in many Indias (WiMi) strategy and CCBTs (country category business teams), and reimagining its journey to a tech-enabled intelligent enterprise, the brokerage said.
 
Nomura
With significant step-up in digital muscle, HUL is well-prepared to not just compete with, but also win against digital-first/ D2C (direct-to-consumer) products, according to the rating agency. It continues to gain share in over 75-80 per cent of its businesses. Nomura said it expects gross margin pressure to be transient as HUL continues to hike prices.
 
Prabhudas Lilladher
 HUL’s strategy of introducing consumers to the bottom of pyramid products and then moving them up to premium products will continue to provide competitive growth, the brokerage said. Increased adoption of technology across the supply chain will further strengthen the business model.
 
Emkay Global
HUL’s management is optimistic on medium-term growth outlook and targets double-digit earnings per share (EPS) growth, the brokerage said. It continues to drive strong cost savings and expects another 300-400 bps margin gain to come from GSK synergies. “The commentary emphasised significant leverage on data analytics and technology across functions, which will be a competitive advantage, going ahead.” Emkay Global, which along with JM Financial and Systematix Shares has a ‘hold’ rating, added that after the recent run-up there is limited upside potential in the stock.
 
JM Financial
Commitment to double-digit growth was reiterated with a clear strategy of doubling the distribution of the nutrition category — helped in part by the launch of access packs, according to JM Financial. The brand (Horlicks) has also been re-staged to more effectively deal with nutritional deficiencies at the mass end and high-science innovations at the premium-end.
 
On margin synergies, though, JM Financial said, its calculations suggest that there has been a scale back in medium-term nutrition margin-synergies target of 180-230 bps.