New Delhi: After rallying over 20 percent since the beginning of August to hit a new high last Monday, twice the 10 percent rise in the benchmark Sensex, shares of Hindustan Unilever (HUL) have taken a leap upward.
A scale-back of 180-230 basis points (bps) in the medium-term margin-synergies target for the nutrition business could be an overhang.
HUL has successfully integrated the back-end system of the 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 a 24-25 percent 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.
In the past decade, HUL’s sales have seen a compound annual growth rate of 9 percent and Ebitda (earnings before interest, taxes, depreciation, and amortization) margins have expanded 1,000 bps.
With the long runway for growth in FMCG in India, increasing premiumization, and synergies from GSK Consumer Healthcare, earnings could continue to grow at 14–15 percent CAGR over the next 10 years.
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.
With a 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 a share in over 75-80 percent of its businesses. Nomura said it expects gross margin pressure to be transient as HUL continues to hike prices.
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.
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 emphasized 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.
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.