Hindustan Unilever Ltd - Q2 FY21 Result Update - YES Securities

2QFY21 investor call takeaways

Uncertainty still remains but company well prepared to benefit from the impending recovery; recommend buying on dips

Presentation summary

- Segmental performance - 19% growth in base foods and refreshment business ex- GSK, flat in Beauty and Personal Care, 1% decline in Home Care; 100 plus SKUs launched in last 6 months

- Raw material scenario - Tea prices up 70% yoy, palm oil prices up 40% yoy and crude prices down 30% yoy

- Operations update - 100% operations at all factories and depots, 120 plus alternate suppliers, effective coverage up y 10%, assortment up by 70%, 270k outlets onboarded on eB2B app - Shikhar, e-commerce contribution increased by 2x

Management outlook

- Operating environment has improved with sequential unlocking of economy although demand in metros still remains muted, rural demand much more resilient

- Commodity volatility and inflation is likely to continue in near term which will keep up pressure on gross margins

- Digital agenda has been revisited in times of COVID

- General trade is now more open to adopting digital technologies (2.7 lakh outlets onboarded on Shikhar app)

- Clear tailwinds seen for the e-commerce industry with revenue share doubling to 6%

- Consumer purchase behavior has changed towards toward immunity and in home consumption-focused products

- Accelerated innovation to capture new growth opportunities with focus on volume led growth and strengthening of portfolio

Q&A highlights

- Foods - In-home consumption has increased a lot with out of home being impacted but overall portfolio delivering exceptional growth

- Skincare - Trade buying for skincare is generally done in September month however this year purchases will happen closer to winter

- National launch of Domex and Boost - Focus towards hygiene and cleanliness calls for Domex to be launched nationwide; Boost has a huge potential to grow as brand is available only in certain pockets of the country

- Purchase preferences - Consumers in cities buying larger sized packs with lower frequency of purchases whereas consumers in smaller cities buying smaller pack sizes

- A&P spends - Higher ad spends planned to invest across all categories and brands

- Modern trade - Impacted as malls were shut and consumers continued preference to visit local stores and avoid large crowds

- General trade - Will remain the biggest channel with adoption of technology and science of retailing

- Glow and Lovely - A&P spends towards rebranding expected to continue in 3Q; rebranding exercise will help target more consumers for a more inclusive skincare experience

- Supply chain - No supply constraints seen unless there is a 2nd wave of cases

View - Overall management commentary though cautious gives confidence that the worst is behind us although the timing of recovery in urban demand still remains uncertain. But HUL though its sharp execution, operational agility and brand portfolio seems well prepared to benefit from the impending recovery much ahead of competition. We would therefore expect another phase of outperformance to resume post the recent consolidation and expect the stock to re-rate towards 50x FY23 earnings from current levels of 44x, implying a fair value of ~Rs 2,500.

- Result summary - Strong set of numbers led by better than expected growth in the foods and beverages business coupled with margin expansion despite commodity headwinds. Revenue/EBITDA/PAT growth of 16%/17%/10%, marginally ahead of estimates across all fronts.

- Topline - Revenue growth of 16% yoy (3% yoy revenue and 1% yoy volume growth ex-GSK) with 70% of portfolio gaining market share and 80% of portfolio (Health, Hygiene and Nutrition) growing in double-digits; 20% discretionary portfolio also improved sequentially after a 45% fall in 1Q to a 25% decline in 2Q.

- Margins - Gross margins reduced 150bps yoy to 53% given inferior mix and RM headwinds in tea and palm oil; while EBITDA margins improved 30bps to 25.1% mainly due to lower selling expenses.

- Segmental performance - Home care down 2%, personal care flat and foods growth at higher than expected 83% (19% growth ex-GSK) led by double digit growth in tea, coffee and GSK portfolio; margins improved across segments led by strong cost controls especially ASP and timely pricing action especially in tea.

- Earnings - PAT growth of 10% was lower than EBITDA growth of 17% given lower other income and lower tax rate in the base quarter.

- Outlook - Rural growth is resilient and should sustain while urban growth looks uncertain although worst is behind, gross margins would remain under pressure due to inflationary commodity environment; management remains cautiously optimistic about demand growth going ahead.

- Dividend - Rs14 per share interim dividend declared.

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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