Stock to Buy Today- Hindustan Unilever

Investment Idea – Hindustan Unilever
(CMP: INR2624 TP: INR3000, 14% Upside, Buy)
HUL is seeing signs of earnings growth recovery, fuelled by the normal monsoon, fertilizer subsidy, and gradual reduction in commodity costs from the decadal high levels and recovery in the premium personal care portfolio. Palm oil prices have declined by 43% from their March peak and sustained at those levels. Even crude oil has corrected sharply to a 7-month low of $90/bbl.  The softer commodity prices are likely to favor HUL in 2HFY23. Once the ongoing high material cost environment abates, we believe HUL could revert to mid-teens earnings growth.

HUL is the best prepared among peers on the technology as well as the e-commerce strategy front to deal with potentially significant disruptions ahead. While the pace of earnings recovery to double-digit and then mid-teens will be gradual, improving narrative will keep multiples high for the bellwether FMCG company. HUVR’s sales and volumes were ahead of expectations in 1QFY23 but gross profit, EBITDA, PBT, and PAT were broadly in line.

 Margin pressure led by commodity cost inflation is likely to persist in 2QFY23E, before sequential improvement from 3QFY23E onwards. Within the premium personal care portfolio, skin care is ahead of pre-Covid levels although the color cosmetics portfolio is still below the pre-pandemic levels despite the recent recovery in mobility.

Signs of incipient earnings growth recovery are getting better – but only gradually – fueled by a possible good monsoon, fertilizer subsidy, gradual reduction in commodity costs from the decadal high levels, and recovery in premium personal care portfolio. We maintain BUY with a TP of INR3,000.

Source Motilal Oswal Financial Services.
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