HUL’s Ebitda margins have expanded by more than 1,000 basis points over FY11-21
HUL is expecting a modest margin expansion and a double-digit EPS growth, going ahead
Hindustan Unilever Ltd’s (HUL) shares hit a new 52-week high of ₹2,825 apiece on the NSE on 6 September. Since then, the stock is hovering around the same levels. No doubt, valuations are pricey what with the stock trading at almost 61 times estimated earnings for FY23, based on Bloomberg data. The adjacent chart shows how some of the other fast-moving consumer goods (FMCG) firms fare on valuations based on price-to-earnings multiples.
Notwithstanding HUL’s expensive valuations, analysts have come back pleased after attending the firm’s annual investor meet last week. Analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a report on 13 September, “We expect HUL’s enhanced digital capabilities to widen its competitive lead versus peers, and believe it is taking the right steps to succeed in the emerging segment of D2C/digital-first products (sales contribution from digital at about 10%, highest versus peers)."
The broker further added, “With increasing mobility and rising demand for discretionary products, we expect HUL to benefit from the uncoiling of demand in out-of-home/discretionary categories (higher-margin)."
In its investor presentation, HUL said its Ebitda margins have expanded more than 1,000 basis points (bps) over FY11-21. Ebitda is earnings before interest, taxes, depreciation and amortization. One basis point is one-hundredth of a basis point. During the same period, revenues have risen at 9% compound annual growth rate (CAGR).
For the next decade, HUL is looking at a modest margin expansion, driven by cost savings, premiumization and nutrition business synergies. Further, it expects a double-digit growth in earnings per share (EPS).
“HUL’s prowess in extracting savings across cost-lines remains the bedrock underlying this agenda. Savings and scale leverage apart, equally important in this regard would be the efforts to drive portfolio premiumization and build what is referred to as “categories of the future"; these are typically margin-accretive versus the base portfolio," said analysts from JM Financial Institutional Securities Ltd in a report on 9 September.
At the meet, HUL’s management reiterated its growth strategy and one of the ways is to strengthen its core portfolio through superior products and premiumization. Jefferies India Pvt. Ltd analysts said, “HUL sees six mega consumer trends in the next decade, viz. a) consumers moving away from stereotypes, b) looking for authenticity (naturals & local products), c) hyper-personalization, d) rapid digital adoption, e) increased caring for holistic health, f) environment/sustainability."
To be sure, in the past month, the HUL stock has outperformed the broader market, appreciating nearly 16%. In comparison, the Nifty 50 index and Nifty FMCG index have risen 5% and 10%, respectively. As such, higher valuations and the recent appreciation could limit significant upsides in the near future.
Analysts from Emkay Global Financial Services Ltd await a more visible pick-up in earnings growth after the recent underperformance versus peers. “Correction in key commodity prices can offer upsides to forecasts whereas rural slowdown remains a risk," it said in a 12 September report.
Meanwhile, sales recovery after the June quarter remains a key monitorable. While the September quarter performance may show a good recovery, how growth pans out in the second half of FY22 remains to be seen given robust growth in the same period last year.