Hindustan Unilever Ltd - Q4FY21 Result Update - YES Securities

Strong quarter but near-term demand / commodity headwinds can bring down valuations

Result Highlights

- Quarter results - 34.6% growth in topline (21% ex-GSK with 16% volume growth), 150bps EBITDA margin improvement and 41% PAT growth; home care grew 15%, personal care grew 20% and foods grew 36% ex-GSK; dividend increased from Rs 25 in FY20 to Rs 31 in Fy21 (in addition special dividend of Rs 9.5 increased payout to Rs 40.5 per share).

- Portfolio mix - Health, hygiene and nutrition portfolio grew 22%, discretionary grew by 10% and out of home grew by 61% from a low base; FY21 growth rates for 3 segments were 12%/-15%/-26% respectively.

- Margin improvement despite headwinds - Despite inflation in prices of palm oil, tea, crude oil and increased competition, margins improved due to a 2% sequential pricing increase, increased cost savings and GSK nutrition business synergies.

Valuation and view - The 4Q performance by the company was marginally ahead of expectations as laggard segments like detergents, cosmetics, skin care have recovered well and margins also improved. Going forward, nutrition portfolio should be a key growth driver for the company. The company is well placed to grow ahead of the market given its innovation initiatives, distribution expansion and digital initiatives. Despite sharp commodity inflation, margins moved up indicating HUL's strong and agile pricing strategy in addition to its strong cost savings agenda, which should help it gain market shares till the time commodity inflation sustains.

But given the near-term headwinds on both the demand and margin fronts, we believe the stock is fully priced around current valuations with limited absolute upside. Although we do not expect a significant correction in the current market volatility given HUL's solid defensive characteristics, we would still advise waiting for a better entry point for further buying. We model in revenue/EBITDA/PAT CAGR of 11%/13%/14% over FY21-23E and assume coverage with a REDUCE rating with a PT of Rs 2,503 based on 55x FY23E earnings, a 10% premium to its 5-yr average multiple.

- Updates on nutrition business of GSK - System and processes have been seamlessly integrated, portfolio has been expanded with the launch of Horlicks Protein Plus, penetration and volumes were boosted by scale-upin Horlicks and Boost sachets and EBITDA margins are tracking better than expectations.

- COVID Wave 2 impact - Increasing COVID cases is leading to falling population mobility and localized restrictions but India should be able to come out of this given vaccination program and behavior changes; 90% of eligible HUL employees vaccinated and company operating with tiered operating protocols and flexible models.

- Supply chain agility - Better than pre-COVID agility and responsiveness of supply chain is ensuring continuity of supplies - capacity has increased 30%, multiple distribution models being given liquidity support, company has reached 5 lakh Shikhar outlets indicating rapid digitization, increased focus on E-commerce, GT and rural channels.

- Innovation and premiumization - Higher innovation intensity with 150 plus SKU launches in FY21, top brands saw 5x growth rates vs FY20, premium products grew 2x vs core, WIMI created market development opportunities, health, hygiene and nutrition portfolio grew 12% in FY21.

- P&L and balance sheet management - Company has retained its 8% annual savings agenda, net revenue management will ensure accurate and timely pricing actions, aggressive R&D investments sustained, higher focus on analytics.

- Digital transformation - Technology investments have been upped in last year with creation of a people data hub which has increased agility and innovation, Shikhar app has increased digital order capturing and digital factories and automated warehouses have improved operational efficiency.

- Outlook - Difficult to predict demand given pandemic surge but agility and responsiveness across the value chain is better than pre COVID levels, timely price actions and cost savings should help offset elevated commodity inflation, focus will remain on volume led competitive growth, innovation, market development and digital transformation.

CONCALL TAKEAWAYS

- Market share and volumes - 82% business gaining volume share and 87% of business gaining penetration.

- Price hikes - Total pricing increase of 2% for the entire portfolio in 4Q, 2 rounds of price increases (7-8%) taken in soaps with more to follow given 40-50% increase in palm oil prices, can go up to 14-15% if competition remains rational, took further calibrates price hikes in tea which helped margins, have revered price cuts taken in laundry has crude continued to inch up.

- GSK business performance - Reinvesting savings into product and price to recruit new customers and improve affordability, going ahead of estimates on margin improvement, expanded margins by 370bps to 31.8% in FY22 with low teens growth.

- Innovation - Launch only in case of unique preposition and right to win, will remain aggressive on innovation in FY22 after 150 SKU launches in FY21.

- COVID impact - Local lockdowns instead of national lockdown seems to be a good move, supply chain much better prepared although 2nd half of April has seen some impact.

- GT and chemist channel - Shikhar B2B app and Shakti entrepreneurs are helping, chemist channel footprint has expanded post GSK acquisition, restricted operational hours for general retailers have not had much impact

- Hygiene segment - Lifebuoy has gained market share, Domex still small; have high hopes from Nature Protect.

- Shikhar B2B app update - It has not replaced current ordering system but is complementary as an additional option for the retailers, business grew 6x in FY21 vs FY20; both frequency of usage and order value have increased.

- Demand environment - Normative growth was 2-3% in base quarter vs reported 9% decline due to COVID impact and pipeline shift, so 10% 2-yr CAGR is the run-rate till now which is a strong consumption growth in the management's view.

- Margins - BPC margins impacted sequentially due to calibrated price hikes in soaps and sharp sequential palm oil inflation, home care margins improved given low cost commodity inventory being utilized.

- GSK portfolio expansion - Yet to take a call on the biscuits portfolio which has come down, aggressively focusing on the high sciences portfolio under Plus brand which will see more launches, penetration is only 25% and strong in East and South markets, so focusing on geographical expansion and increasing penetration via better affordability, sales integration is still underway, so benefits of outlet scale-up still to fructify fully.

- Commodity outlook - Crude prices are uncertain, agri prices should cool off post the new crop in a few months.

- Premiumisation - Demand remains resilient as long as supply chain and distribution is working well, premium brands have not seen any significant impact of the pandemic.

- Rural outlook - Consumption story should remain strong if pandemic does not go deep into rural markets.

- Urban vs rural growth - Urban markets grew in low to mid-single digits vs negative in December while rural continued to grew double digit in both 3Q and 4Q

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2353.85 as compared to the previous close of Rs. 2409.05. The total number of shares traded during the day was 178827 in over 16485 trades.

The stock hit an intraday high of Rs. 2444.45 and intraday low of 2331. The net turnover during the day was Rs. 422662868.

Source : Equity Bulls

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