Nomura research, Hindustan Unilever -Move to Neutral– Look for a better entry point

Move to Neutral– Look for a better entry point
Levers working well again;
Upgrade to Neutral; would wait
for a better entry point

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Action: Upgrade to Neutral, TP raised to INR527
We upgrade HUVR to Neutral from Reduce and raise our TP to INR527
from INR327 on the back of structural improvements in the business. We
have, over the last year or so, unsuccessfully argued that volume growth
performance is unlikely to sustain and that valuations are likely to correct.
But given the continued strong delivery on the operational front, valuation
premiums have indeed only expanded further. We now believe HUVR has
turned a corner and valuations are likely to sustain at higher levels than
the long-term average in the near term. We struggle to build a Buy case
from current levels, but we like HUVR from a fundamental view and reckon
it would likely garner more interest on any correction from current levels.
Catalysts: Sustained volume growth and soft commodity prices
We see two key catalysts for stock price performance in the near term.
First, we believe continued delivery on volume growth will be the key
deliverable to watch. Second, soft commodity prices should allow the
company to invest in growing the brands and innovation pipeline, which in
our view will be key for long-term growth.
Valuation: HUVR trades at 31.7x FY14F PE
Given the sharp run-up since 1 August, (HUVR +17%, FMCG index +7%,
Sensex +7%), HUVR now trades at 31.7x FY14F EPS of INR17.27. Given
our forecast 16-18% earnings growth over the next couple of years, we
believe it is difficult to build a Buy case from current levels. However, we
note HUVR’s strong franchise means the stock would likely garner more
interest on any correction from current levels.