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Hindustan Unilever is again the top pick of global brokerage firm CLSA. The global brokerage firm has a buy rating on the stock with a price target of Rs 2,900 implying a 17% upside.

“A progressively improving outlook for HUL with the prospect of sharp business recovery, particularly with mix change in favour of OOH, skincare, its premium portfolio, easing of commodity prices, recent sharp price hikes and integration benefits in its nutrition portfolio,” stated the report released by CLSA. It believes that HUL’s strategic call to pursue market share along with commodity price inflation, impact of the second wave of Covid-19 and integration challenges should keep volume growth for the first quarter of FY22 muted at 9%.

Inflation is likely to affect the margin profile in 1HFY21, given its high-cost inventory position. Palm oil and tea prices have started to ease; CLSA expects effects will be visible from quarter three of the current financial year.

Strategic execution

The global brokerage firm believes that HUL has used the pandemic and inflationary setting to its advantage. Initiatives like rapid distribution in rural markets, digitising general trade, driving penetration on acquired GSK portfolio and gaining access to the pharmacy channel should drive long-term share gains.

Valuation

CLSA has come up with a price target of Rs 2,900 is based on 60x Mar-23 earnings, which is a premium to the five-year historical average PE (price to earnings ratio). It believes premium valuations are likely to continue in the context of strong execution and a near-term focus on share gains.

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