We remain an ‘underweight’ rating on Hindustan Unilever (HUL) with a target of Rs 600 and will await the revival in volume growth before we become constructive. In our view, near-term catalysts are missing and valuations look rich. Prospect of rising inflation amid weaker monsoon is likely to keep volume growth depressed, which should limit the near-term upside.
Even though strategy of revenue-mix improvement and cost efficiency will help improve margins, rising taxes and royalties will limit earnings growth to the higher single or lower-double digits. Long-term annualised growth expectations (c11-12%) built into the current valuation look rich if not excessive.
Investor meet on July 1 highlighted that HUL remains upbeat about sustainable long-term growth opportunities across its categories. Despite the slowdown HUL has continued to build long range capabilities and invest behind its brands. In 2013, HUL increased its direct coverage of outlets to 3.2 million from 2.1 million a year ago, an addition that equals what it did in 2009-12. HUL is increasingly leveraging non-TV media in its incremental promotional and ad-spend and using creative means such as mobile radio entertainment to deliver its advertising in media dark areas. It competitive strategy is astute and encompasses a) pace of innovation, b) profitable volume, c) cost leverage and efficiency.