Hindustan Unilever - Miss led by supply chain disruptions - Q4FY20 Results Review - HDFC Securities

HUL posted weak performance across all fronts in 4QFY20 despite our estimates being lower than consensus. Revenue and volume decline of 9% and 7% was impacted by weak BPC market growth and lockdown led trade destocking in March. Lockdown led supply chain disturbance will be resolved in the coming months. However, underlying demand which was already reeling in FY20 will be further impacted in FY21. Consumer trends are expected to change sharply for many categories in FY21. Discretionary, OOH consumption and rural will remain tepid. In our recent thematic report (link), we have already cut down estimates for our coverage universe. However, we expect there can be more downside risk to our estimates for all. We cut our EPS estimates for HUL by 7-8% for FY21 and FY22. We value HUL at 47x on Mar-22E EPS, our TP is at Rs 1,969 (earlier 2,113). Maintain REDUCE.

Revenue weakness again led by BPC: Revenues declined by 9% (+9% in 4QFY19 and +4% in 3QFY20) vs expectation of 3% decline. Volume dipped by 7% (+7% in 4QFY19 and +5% in 3QFY20) vs expectation of 1% decline. Decline in Home Care/BPC/F&R was 4/14/7%. The impact on BPC was sharper as a result of weak demand pre-Covid along with the lockdown impact.

Miss in margins: GM expanded by 142bps to 53.7% (-27bps in 4QFY19 and +44bps in 3QFY20) vs. exp of +119bps. Reclassification of certain cost lower down RM (impact was 40bps). Employee/A&P/Other expenses increased by -12/+5/-8%. The increase in A&P led to a dip in EBITDA margin of 40bps to 22.9%. Adj EBITDA margin was down 160bps to 21.8% (+83bps in 4QFY19 and +237bps in 3QFY20) vs expectation of +220 bps. EBITDA declined by 16% YoY. EBIT margins for Home Care/BPC/F&R up by +131/-291/-547bps.

Call & other takeaways: (1) HUL's 80% portfolio gained market share, aggregate market share up by 50bps, (2) Rural and discretionary categories impacted consumer offtake in March (down by 1% in value/vol terms), (3) Out of 12% revenue swing post Covid, ~6% was attributed to constraints at the distributor level and ~3% at the retail level, (4) Co is now working at 75- 80% of capacity, (5) Downtrading within SKUs is possible, (6) Recent innovations were around Lifebuoy (Germ kills spray and hand sanitizer), Domex and Surf Excel.

Maintain REDUCE: While HUL remains a resilient business model within the sector, it's not immune to slowdown given select discretionary categories and possible downtrading. Recent run-up amidst flight to safety, limits upsides in the medium term. Risk-reward is unattractive.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2082.3 as compared to the previous close of Rs. 2195.7. The total number of shares traded during the day was 224878 in over 18984 trades.

The stock hit an intraday high of Rs. 2159.5 and intraday low of 2066.55. The net turnover during the day was Rs. 473730576.

Source : Equity Bulls

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