Prabhudas Lilladher's research report on Hindustan Unilever
We change FY23/24/FY25 EPS by 1.3%/-1.0%/-2.5% factoring 1) staggered 80bps increase in royalty rates beginning Feb23 2) 50bps cut in ad spends and 3) increase in other income. HUL continues to guide for QoQ GM/EBITDAM improvement in 4Q23 with stabilizing inflation, narrowing cost price gap and calibrated price hikes/cuts. 3Q23 saw another quarter of midsingle volumes led by double digit volume growth in Home Care, mid-single digit volume growth in Tea & high-teens volume growth in Foods. While HUL gained 10ppt margins between 2013 to 2023, however given current margin band of 23-25%, 80bps royalty rate increase over 3 years will curtail margin expansion. In the absence of meaningful margin expansion beyond FY24, sales and PAT growth will move in tandem which will prevent meaningful re-rating of the stock.
Outlook
We estimate 12.9% Sales and 15.7% PAT CAGR over FY22-25 and assign a DCF based target price of Rs2800 (Rs2798 earlier). We expect moderate returns in near term given valuations of 45.2xFY25 EPS. Accumulate on declines.
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