26 June 2015
Hindustan Unilever Limited (HUL)’s annual positive outlook on the foods and personal care segments. Over the last five years, HUL has made significant strides in expanding its distribution reach (3x), time to market, tapping new platforms for advertising and promotion (c.30% non-TV), and improving the backend systems. All these factors will help the company to grow faster than the market over the medium to long term. However, the current market growth rate is at a ten-year low and we cannot see major perceptible improvements in the near term. Apart from this, HUL is trading at 10-year peak valuation of 41x one-year forward earnings, which is compounded by high investor expectations — this leaves limited room for negative surprises. We continue to maintain our Neutral recommendation, valuing the company at 35x FY17E (unchanged) earnings at Rs 844 (unchanged).
Home care: The Company will focus on three aspects for home-care category growth – premiumisation, category creation, and profitability. Premium laundry grew at 2x mass laundry in 2014 and Surf Excel displaced Wheel to become the largest HUL brand. The company continues to invest in new categories like ‘matic’ powders, fabric conditioners, liquid detergents and water purifies, which have grown at more than 20% in 2014. Pureit has broken even in the last few years and the category continues to deliver superior growth.
Personal Care: Fair & Lovely, the largest skin care brand is back on the growth track driven by optimum formulation, right communication, and innovations such as BB and SPF creams. Deodorants, which was losing market share, has started to outperform the market after the launch of Axe Signature. Recently introduced Dove Elixir Oil has struggled since launch and the company will invest in developing the category in the near future. Recently launched products like Ponds Men Facewash and Lakme Lip Love have gained high single-digit market share in just a few months. HUL is currently #1 in face care, hands & body, hair care, skin cleansing & makeup; #2 in oral care, and #3 in deos. The management also indicated that FY16 is likely to be better for oral care compared to FY15.
Foods & refreshments: Tea has grown 1.5x the market; green tea at 6x the overall tea category and it is 2x more profitable than black tea for HUL. Bru (coffee) is the volume market leader and is inching towards becoming the value leader as well. Currently, 21.5mn households have been contacted through the ongoing Bru activation program. Ice creams grew in double digits with recently launched Magnum contributing to 37% of growth. To reduce retailer’s costs and investments and to drive reach, the company has innovatively introduced mini cabinets, which are a third the size of retailers’ regular refrigeration cabinets. Packaged foods (Kissan and Knorr) grew ~15% in FY15 and 3.5x the market.
Maintain estimates, recommendation (Neutral), and target price: Currently, the company trades at 43x/37x FY16/FY17 estimated earnings. We value the company at 35x FY17E earnings at Rs 844. Our target multiple of 35x is at a premium to the FMCG sector’s multiple of 33x based on HUL’s ahead-of-market growth prospects, highly diversified product portfolio, and market leadership position across categories. Taking into account the slight downside from current levels and sluggishness of growth in FY16, we maintain our recommendation at Neutral.