Hindustan Unilever - Volume focus over margins continues - ICICI Securities

Strong double-digit growth in health, hygiene and nutrition portfolio was encouraging to note in 3QFY21. However, underlying volume growth of 4% (JYL reported 15% volume growth on the same day) was a tad underwhelming. We note that this underperformance could reduce given HUL's focus on volume growth even at the expense of gross margins in the near-term (see report). We like the (1) increase in consumer-relevant innovation intensity for hygiene related products (and more), (2) double-digit growth in nutrition business (albeit potentially at lower margins), (3) increase in assortment & outlet coverage (back to pre-Covid levels) and (4) continuing plans to gain market share in tea from unorganised players by partially absorbing input cost inflation. Maintain ADD.

We note that 3Q results missed comments on profitability of Nutrition business (was mentioned in 1Q and 2Q) - a potential risk to margins given Foods & Refreshment margins down 380bps YoY.

- Overall revenue performance improved: Reported revenue / EBITDA / recurring PAT grew 20% / 17% / 15%. Underlying domestic consumer business revenue (excluding merger of GSK CH and VWash) grew 7% with 4% volume growth (UVG). Health, Hygiene and Nutrition (80% of company portfolio) witnessed 10% revenue growth. On the other side, discretionary segments of Skin care, 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 1% and 15% respectively.

- Gross margin impacted due to commodity headwinds: Gross margin declined 25bps to 54% due to an inflationary trend in input costs which was largely offset by price hikes and better product mix. HUL continued with the strategy to not pass on the steep inflation completely through price hikes in order to gain market shares. It continues to believe that if it can retain and recruit new consumers, margin expansion can be achieved over time.

- Cost savings, lower ad-spends limit operating margin decline: Reported EBITDA margin declined 90bps YoY to 24.1% due to higher other operating expenses (+70bps YoY) - increased investment in GTM strategy to capture demand when it revives, investment in packaged foods and future capabilities.

- Valuation and risks: We cut our earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 15 / 16 / 15 (%) over FY2020-23E. Maintain ADD rating with DCF-based target price unchanged at Rs2,600. Key downside risks are delayed recovery in demand and irrational competition.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2390.75 as compared to the previous close of Rs. 2398.9. The total number of shares traded during the day was 137939 in over 6537 trades.

The stock hit an intraday high of Rs. 2421 and intraday low of 2334.85. The net turnover during the day was Rs. 326030619.

Source : Equity Bulls

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