HUL: Lower input costs, double digit demand to drive earnings upgrade

Analysts expect company to command premium valuations as it is growing ahead of the pack

Analysts were not particularly bullish on Hindustan Unilever considering its rich valuations in the face of slowing growth. But they are now of the view that HUL will continue to command premium valuations as it is growing ahead of the pack. 

In the first six months of FY15, the revenue growth logged by the sector was 5-6% while Hindustan Unilever's revenues grew by 12%.

HUL’s double-digit growth has been driven by a broad range of segments and not just one or two categories. Analysts believe there is potential for strong growth in several categories where the company has a sizable presence.

In the face of slowing economic growth, demand for personal care products and food decline, but in the first half of the fiscal, HUL reported strong growth in these categories as brands like Fair & Lovely, Lakme, Clinic Plus, Dove, Kissan and Knorr grew at a healthy pace. 

According to Prabhudas Lilladher, “Consumer demand is directionally positive from past 2-3 months in both rural and urban India. Winter has been very weak and could drag sales growth.” While the brokerage is maintaining its earnings per share target for FY16 and FY17, it expects a single digit upgrade once uncertainty over crude prices ends.

Thanks to the sharp fall in costs inputs like PFAD, LAB and soda ash, HUL is looking at de-stocking expensive inventory before cutting prices. Analysts expect competitive intensity to increase as input costs fall and advertising-promotion spends increase. If input costs sustain at lower levels, analysts expect earnings to improve by 6-10%.Lower input costs and a secular uptick in demand is expected to give a boost to the bottomline. 

According to Emkay Global, operating margins have gradually risen from 15% in FY12 to 16% in FY14 driven by efforts on management of overheads (materials manufacturing, distribution & supply chain) coupled with better product mix and smart pricing strategy.

“These efforts should drive EBITDA margins to 17% in FY15 itself and sustenance thereafter,” the brokerage believes.