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Buy Hindustan Unilever, target Rs 2,070: Motilal Oswal Securities

Motilal Oswal Securities has given a buy recommendation on Hindustan Unilever with a target price of Rs 2,070.

Shares of Hindustan Unilever traded at Rs 1,827.95 around 1:35 pm on 14 June, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Detergents continue to play a key role in driving HUL’s overall growth (based on Form No. MGT-9 in the annual report). However, the brokerage highlighted that it was crucial to keep a close eye on competitive actions, especially from P&G.

Performance of soap segment has been tepid over the past four years, although some bounce back was seen in FY19. Its third largest segment- cosmetics & toiletries (C&T)- has again started contributing significantly to overall sales in FY19 after a muted show in the preceding two years.

HUL’s annual report enumerates the success that it has witnessed in the acquisitions of Indulekha, Adityaa Ice-cream and GSKCH and also the ambitious plans it has charted to take these businesses to the next level, the brokerage said.

Moreover, the brokerage underscored the company’s access to impressive cash flows, ability to leverage on its best-of-breed distribution reach, unmatched understanding of usage of lower unit packs and new-found nimbleness in all aspects of decision making.

“All this reaffirms our conviction that inorganic growth will continue to be a key part of the company’s incremental growth,” said the brokerage.

The brokerage believes that HUL is likely to continue outperforming smaller players on the volumes front.

The brokerage highlighted the emergence of four key trends that have the potential to drive an elevated earnings growth trajectory:

Rapidly improving adaptability to market requirements.

Recognition and strong execution on Naturals and other evolving categories.

Continuous strong premiumization trend.

Extensive use of technology, creating further entry barriers.

“If we incorporate the GSKCH merger (no clarity on the date yet) in our estimates, then it will result in 8-9 per cent addition to EPS in FY21, which means that the stock is trading closer to 43 times FY21E EPS against over 46 times as it appears currently,” the brokerage said.

This valuation premium should sustain, given the company’s best earnings growth visibility in the large-cap Indian consumer space and by far the highest return ratios, the brokerage added.

Source: Economic Times