While the consumers are impacted by lower cash in hand, trade channels are down-stocking due to a liquidity squeeze, impact of which is maximum on wholesalers and is varied across geographies. HUL expects the market growth to be adversly impacted “for a few months” and the speed of recovery would be subject to the improvement in the liquidity conditions. Demonetisation and GST create a level playing field with unorganised players. HUL organised a call with the CFO to discuss the impact of demonetisation.
Key takeaways
Wholesale channel hit the most: Bulk of the business done by the wholesalers is in cash and hence the ability to carry inventory by this channel is impacted the most. HUL reiterated the importance of this channel to reach 8 million retail outlets, economically. The mode of payment won’t make the wholesale business unviable, according to the company. The company will increase the direct distribution going forward. The company increased the credit periods earlier and expects those to ease the working capital stress.
Demand environment weak: Liquidity squeeze is resulting in lack of purchase by consumers. HUL might introduce promotions to rejuvenate consumer off-take, rather than channel stuffing.
Silver lining: HUL highlighted that the Southern markets are recovering very fast, along with the Modern Trade and Chemist channel. Company expects the recovery to happen faster in the urban markets and penetration of banking channel in any geography would define the pace of recovery.
No change in strategy
HUL reiterated that premiumisation would be the core agenda of the company and there’s no change to the long term strategy. The company expects the consumer and distribution landscape to change “dramatically”. The company isn’t concerned too much about production cuts and the decision on pricing will continue to be a function of cost pressures.
Change of estimates
While we have kept FY17 estimates unchanged, we are increasing the estimates for FY18 and FY19 by c8% and c12.6% respectively to factor higher potential growth rates from the soaps and detergents portfolio.
Valuation
We value HUL using a DCF-based methodology. HUL is currently trading at a 12-month forward P/E of 33.2x, which is a 13% discount to the broader consumer sector. Given HUL’s leadership position, we believe this discount is unwarranted. We upgrade HUL to a Buy, with a price target of R1,000, implying 24% upside from current levels.
