Jefferies said Hindustan Unilever has historically shown resilience and has even outperformed its peers during disruptions like demonetization and GST rollout. While this has not been the case though during Covid-19 crisis due to pressures in its ‘high margin‘ discretionary (grooming) portfolio and it reflected in the stock price underperformance versus peers, it should reverse with improving economic activity driving a growth acceleration during the second half of the ongoing financial year, said Jefferies.
The brokerage estimates that Hindustan Unilever’s discretionary portfolio contributes around 20% to the company revenues but given the superior margins, contributes nearly 30% to overall company profits.
“Over the past few months, there has been a steady improvement in the overall economic activity. With further improvement in macro, we expect that there should be an improvement in HUL’s earnings in the 2HFY21 as grooming segment picks-up,” said Jefferies.
“The stock now trades at 52 times FY22 P/E – while valuation remains punchy, this should sustain in the context of an earnings acceleration in the coming quarters. The discount with peers is also narrowed to 5Y (year) average,” said Jefferies.
Jefferies expects normalcy to return over FY22-FY23, which should drive a 16% compounded growth in earnings per share for Hindustan Unilever, which is comparable to most peers.