Buy Hindustan Unilever; target of Rs 2502: Prabhudas Lilladher

Prabhudas Lilladher's research report on Hindustan Unilever

We are upgrading HUL to Buy given strong growth and margin outlook, high FCF conversion (5-year average of >90%), 95% dividend payout and 18.2% PAT CAGR over FY1-23. HUVR results beat expectations driven by double digit growth in Health, Nutrition and Hygiene and better than expected recovery in Personal care. HUL remains confident of gaining market share across categories and has cut prices of Detergents and absorbed part of input cost increase in Tea. Although color cosmetics and Deo’s will see a delayed recovery, lack of inventory push will enable strong 3Q relative to last year. GSK integration is in progress and any meaningful gains in sales growth will accrue from 4Q only. Near term margin outlook remains challenging given higher prices of Palmoil and Tea and bottomed out ad- spends. We remain structurally positive on HUL given its strategy around emerging categories, increasing distribution, WIMI, digital market and strength in Supply chain. We estimate HUL to post EBIDTA CAGR of 15.9% over FY20-23 led by 200bps margin expansion.

Outlook

We however cut EPS estimates by 2-4% as we increase dividend payout to 95% and assume lower interest on surplus funds. We shift our target price base from PE to DCF and assign a 15-month target price of Rs2502 (Rs2254 based on 46xFY23 earlier). Upgrade to Buy.

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