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Maintain REDUCE on Hindustan Unilever - Miss in volume, no respite on margin front - HDFC Securities

Posted On: 2021-10-21 09:18:16 (Time Zone: IST)

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

HUL's headline numbers are broadly in line. However, weak internals (miss in volume) and cautious outlook on demand and margin are raising questions about the near-term performance. Revenue grew at 11% YoY (HSIE 10%) while UVG, at 4%, was below our estimates (6% HSIE). UVG on two-year CAGR was weak at 2.5% but improved sequentially (-0.4% in Q1FY22) after the second wave of COVID impacted Q1FY22. Health, hygiene, and nutrition portfolio (85% mix) sustained healthy growth at 7% YoY. Within the nutrition portfolio, health food drinks volume grew in double digits. Nutrition portfolio should sustain the momentum as 85% of GTM integration is completed. Gross margin pressure continued in Q2FY22 with 142bps YoY contraction due to elevated commodity costs (crude, CPO, tea, and plastic) and higher freight cost. EBITDA growth was at 9% (HSIE 7%). We expect margin to remain under pressure in the near term, owing to sustained inflation and calibrated price hikes. We cut our EPS estimates for FY22/FY23/FY24 by ~2%. We value HUL at 55x P/E on Sep-23E EPS to derive a TP of INR 2,482. Maintain REDUCE.

In-line revenue, cautious demand outlook: Revenue grew 11% YoY (16% in Q2FY21 and 13% in Q1FY22), with home care/BPC delivering 16/10% (7/5% two-year CAGR). Domestic revenue saw 11% YoY growth (7% two-year CAGR) with volume growth at 4% YoY. The health, hygiene, and nutrition portfolio grew 7% YoY (19% over Q2FY20). Discretionary clocked 31% YoY growth (-2% over Q2FY20) and OOH saw 74% YoY growth (+31% over Q2FY20).

No relief on margin pressure: Gross margin contracted by 142bps YoY (- 145bps in Q2FY21 and -139bps in Q1FY22) due to pressure from elevated commodity costs. Home care EBIT margin contracted by 147bps YoY(+278bps in Q2FY21) to 19%. BPC EBIT margin, at 27.8%, contracted 148bps YoY (+34bps in Q2FY21). F&R margin expanded 179bps YoY. Employee/A&P/other expenses grew by 4/7/9% YoY. EBITDA margin was down 46bps YoY to 24.6% (+28bps in Q2FY21 and -46bps in Q1FY22). EBITDA grew 9% YoY (HSIE 7%).

Call takeaways: (1) While operating environment has improved, FMCG market growth (Nielsen data) saw moderation in Aug and Sep, led by rural slowdown; (2) urban demand is better on a weak base and better mobility; (3) HUL's rural growth remained strong in Q2FY22; (4) no impact from global supply chain issues, owing to Unilever's global procurement; (5) digital channels like Shikhar, eCommerce, and D2C contribute 15% of its demand; (6) the company maintains its EBITDA margin band at 24-25%.

Shares of Hindustan Unilever Limited was last trading in BSE at Rs. 2546.45 as compared to the previous close of Rs. 2654.15. The total number of shares traded during the day was 281904 in over 32861 trades.

The stock hit an intraday high of Rs. 2732.00 and intraday low of 2521.40. The net turnover during the day was Rs. 744991412.00.

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