MOSL: HINDUSTAN UNILEVER (Buy)-Broad-based growth sustained, demand outlook stable

HINDUSTAN UNILEVER – 2QFY19: Broad-based growth sustained, demand outlook stable

(HUVR IN, Mkt Cap USD46.2b, CMP INR1569, TP INR1900, 21% Upside, Buy)

• HUVR’s reported net sales grew 11.1% YoY to INR92.3b in 2QFY19. Domestic comparable consumer business sales increased 12% YoY, with underlying volume growth of 10% YoY (in-line). EBITDA grew 20% YoY to INR20.2b (our estimate: INR20.8b), while PAT (bei) increased 23.1% YoY to INR15.2b (our estimate: INR15.1b).
• Gross margin contracted 70bp YoY to 52%, led by RM inflation. However, EBITDA margin expanded 160bp YoY to 21.9%, driven by cost efficiencies and operating leverage.
• 1HFY18 performance: Sales, EBITDA and adj. PAT grew 11.2%, 20.3% and 22.2%, respectively. Gross/EBITDA margin expanded by 60bp/170bp.
• Concall highlights: (1) Demand sustained in 2QFY19; expected to be stable in near term. (2) Rural growth continues exceeding urban growth. (3) Crude/currency headwinds partially offset by benign vegetable oil/ food prices.
• Valuation view: There is no material change to our EPS forecasts. Continued healthy volume and EBITDA growth brightens the earnings prospects. HUL’s consistently superior volume growth outperformance – even when compared with much smaller players – is likely to continue, in our view. Four key trends are particularly relevant for HUL resulting in an elevation in its earnings growth trajectory of ~20% compared to the past: (1) rapidly improving adaptability to market requirements exemplified by its ‘Winning In Many Indias’ (WIMI) strategy, (2) recognition and strong execution on Naturals, (3) strong trend toward premiumization and (4) extensive plans to employ technology and create further entry barriers. HUL not only offers the best earnings growth visibility in large-cap Indian consumer space, but also has by far the highest return ratios, justifying premium valuations. Recent price correction offers a more attractive entry point. On a target multiple of 50x Sep’20 EPS (~15% premium to three-year average due to significantly improving business fundamentals), we derive a TP of INR1,900. Maintain Buy.