We're increasing our fair value estimate for Hindustan Unilever (HUL) by 6.5% to INR 625 per share, as we account for the time value of money since our last update. Other than this, there are no major changes to our future assumptions for HUL as the company’s recent earnings were broadly in line with our estimates. Over the next five years, we continue to project average top-line growth of 13% per annum, and margins expanding from a five-year historic average of 14.6%, to 15.5%. These projections reflect the firm continuously introducing new products, and distributing them through its expanded retail network.
We maintain our narrow economic moat and stable moat trend ratings, as the firm continues to invest in advertising its brands to new consumers, and ensuring these products become available at the retail shelf. We view the recently increased dividend payout of the company (73% in 2014, versus 60% previously) as attractive for dividend-seeking investors. At current market prices, however, we view the shares as fairly valued, and would suggest that investors wait for a larger margin of safety before initiating a position in HUL.
Valuation, Growth & Profitability:
We're raising our fair value estimate for HUL by 6.5% to INR 625 per share, from INR 587, which implies a forward price/adjusted earnings ratio of 35 times, an enterprise value/adjusted EBITDA ratio of 25 times, and a free cash flow yield of 3.2%. Our fair value continues to be based on a weighted average of our base, upside and downside scenarios in the same weighting 60%-25%-15%, respectively, to more accurately reflect the future possibilities that await HUL. Our base-case fair value estimate has gone up by a similar 6.5% to INR 605, as we adjust our model for the time value of money since our last update. However, our growth and profit assumptions for the business are unchanged.
We continue to project higher average margins of 15.5% over the next five years, versus 14.6% over the last five years, as the company is able to leverage its scale advantages on the procurement as well as distribution side. Our margin forecast for fiscal 2015 remains at 15.3%, as HUL’s 2014 performance was broadly in line with our estimates for the year. Our five-year annual revenue growth assumptions also remain unchanged at 13% on average. We believe the company should recover from the low 9% growth it witnessed in 2014, as a general economic revival in India should translate into higher spending power for consumers across all income levels.
Overall, despite the somewhat unpredictable growth momentum we continue to remain optimistic about HUL's prospects in the Indian consumer markets, as it expands its margins with the help of its premium products, and begins to reap the benefits of its widened distribution reach while offering more consumers its large array of products.
