Buy Hindustan Unilever; target of Rs 2500: ICICI Direct

ICICI Direct's research report on Hindustan Unilever

HUL reported a healthy set of numbers with 16.1% sales growth aided by consolidation of acquired brands (Horlicks, Boost, VWASH). On a like to like basis, growth has been 3% supported by 1% volume growth. Beauty & personal care segment recovered from 12% decline in Q1 to flat YoY sales in Q2. Foods segment saw strong 19% growth supported by price hike in tea segment. Home care segment declined 1.6% with 2.3% price cuts in fabric wash. The recovery in the business was led by complete normalisation of supply chain & strong demand in health, hygiene & nutrition space. However, demand for discretionary & out of home products has still remained dismal. The health, hygiene & nutrition products that constitute 80% of sales witnessed growth of 10% whereas discretionary & out of home consumption products, which constitute 20%of sales saw a decline of 25%. Gross margin declined 145 bps largely on account of a sharp 70% increase in tea prices. Though the company has taken price hikes, it is not sufficient to pass on the entire cost increase. With 221 bps lower advertisement spends, HUL was able to maintain its operating margins at 25.1% (27 bps up). Net profit increased 8.7% to Rs 2009 crore. The slower growth in profitability is largely due to lower tax in base quarter.

Outlook

We believe H2FY21E would witness strong growth across segments with complete demand recovery in discretionary portfolio as well. The company has been able to leverage strong brands in hygiene (Lifebuoy, Domex, Vim, Surf Excel) space to drive growth. We believe the company would continue to witness strong double digit growth in the health, hygiene & nutrition space. Further, margins improvement with consolidation of nutrition brands would drive earnings. We upgrade our recommendation from HOLD to BUY with a revised target price of Rs 2500/share.

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