Hindustan Unilever - Focus on high growth categories; visit note; Buy ::Edelweiss PDF link

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Hindustan Unilever (HUVR IN, INR 403, Buy)

Our positive stance on Hindustan Unilever (HUL) was reinforced after our meeting with the company’s management for its sustained aggression, high volume growth in high-margin categories (personal products), better growth trajectory in S&D, innovation in foods, increasing rural distribution and premiumisation of products. Key risks could be rising palm oil prices and weakening currency. We maintain ‘BUY’.

S&D to maintain momentum; margins to revive in PP

The growth trajectory would continue to be led by a growth in prices; the growth quality would be similar to the December quarter (more price and less volume). Higher palm oil prices though threaten to dent margins. However, calibrated price hikes in soaps and muted ad spends in the category continue. Also, volume in PP remains strong and margin decline in Q3FY12 was led by one-offs like an increase in expenditure on moulds and dyes primarily on account of certain innovations and launches. New launches would be more concentrated in H2FY13 which, in our view, mean muted ad spends in H1FY13.

Excise to be passed on; packaging discussion on

The company is likely to take calibrated price hikes to pass on excise hikes to consumers (exact quantum and timing not known). Also, a change in packaging law, if becomes effective, will be adverse for the entire consumer goods space though larger companies are better placed.

Outlook and valuations: Positive; maintain ‘BUY’

HUL is aggressively investing in categories that will pay rich dividends from a 3-5 year perspective (recently launched Rin Blue). Constant focus on premiumisation is paying off and we do not expect any significant slowdown in demand. At CMP, the stock is trading at 28.8x and 24.6x FY13E and FY14E, respectively. We maintain ‘BUY/SO’ on the stock.

Hindustan Unilever - Focus on high growth categories; visit note; Buy

Regards,