Hindustan Unilever - Willingness (necessity?) to sacrifice gross margins to drive growth - ICICI Securities

Strong double-digit growth in health, hygiene and nutrition portfolio in 2QFY21 was good (overall volumes +1%). There appears a willingness (necessity?) to sacrifice gross margins to drive growth, in our view. Trade loading of winter-season products is delayed a tad (an industry-wide phenomenon, per management). We like (1) investments to repurpose its brands, (2) increase in consumer-relevant innovation intensity for hygiene related products (and more), (3) increase in outlet coverage (back to pre-Covid levels) and (4) (continuing) plans to gain market share in tea from unorganised players by absorbing partial input cost inflation. Growth in nutrition business was underwhelming, however, per management, it should return with supply side constraints now being resolved. ADD.

- Organic revenue performance improved sequentially: Reported revenue / EBITDA / recurring PAT grew 16% / 17% / 11%. Underlying domestic consumer business revenue (excluding merger of GSK CH and VWash) grew 3% with 1% volume growth (UVG). Health, Hygiene and Nutrition (80% of company portfolio) witnessed 10% revenue growth. On the other side, discretionary segments of Skin acre, Deos and Colour cosmetics (15% revenue contribution) and out of home consumption businesses like water, ice-creams, food solutions and vending (5% revenue contribution) declined 25% each. Nutrition business revenues were flattish on a comparable basis due to supply side constraints.

- Gross margin impacted due to adverse mix, commodity headwinds etc.: Gross margin declined 150bps to 53% due to an adverse mix, inflationary trends in input costs of tea. Management intends to not pass on the steep tea inflation completely through price hikes to gain market shares from unorganised players. Moreover, it has cut prices in fabric care portfolio to pass the benefits of lower input costs.

- Cost savings, lower ad-spends limit (comparable) operating margin decline: Comparable EBITDA margin (ex-GSK) declined 60bps due to lower gross margins and was partially offset by savings in ad-spends and cost controls. Consolidation of nutrition business resulted in 90bps positive impact - reported EBITDA margin expanded 30bps YoY to 25.1%. Nutrition business gross margins were also weak, in our view. However, benefits of scale and media buying as well as no royalty payments in the business (Horlicks brand is now owned by HUL) helped improve EBITDA margins.

- Valuation and risks: We cut our earnings estimates by ~5%; modelling revenue / EBITDA / PAT CAGR of 12 / 16 / 19 (%) over FY2020-22E. Maintain ADD rating with revised DCF-based revised target price at Rs2,400 (was Rs2,500). Key downside risks are delayed recovery in demand and irrational competition.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2172.1 as compared to the previous close of Rs. 2178.8. The total number of shares traded during the day was 272156 in over 20222 trades.

The stock hit an intraday high of Rs. 2207 and intraday low of 2133. The net turnover during the day was Rs. 591372681.

Source : Equity Bulls

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