Maintain REDUCE on Hindustan Unilever - In-line show, narrowing down divergence - HDFC Securities

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

HUL posted an in-line performance, with revenue/EBITDA clocking growth of 35/43% YoY (HSIE 34/46%). Ex-GSK, revenue grew by 21% YoY (6% 2-year CAGR) with UVG of 16% YoY (4.5% 2-year CAGR). The company saw demand recovery in in discretionary and OOH categories and revenue pressure eased out. Health, Hygiene and Nutrition (80% mix) continued to deliver strong double-digit growth, supported by new launches and price hikes. Market share gains (>80% portfolio gained share) continued, well supported by strong rural and sustained momentum in e-comm (most profitable channel for HUL). Nutrition portfolio (GSK) posted double-digit growth, well supported by launch of INR-2 sachets and resolution of supply issues. Gross margin contracted by >100bps despite support of high-margin nutrition business (reflecting higher pressure on underlying margin). A&P expenses returned to growth as the company resumed investments to support new launches. Apart from near-term COVID-led disruption (unlike the previous year), we expect a sustained recovery in the discretionary portfolio along with growth acceleration in nutrition portfolio. We maintain our EPS estimates for FY22/FY23. We value HUL at 52x P/E on Mar-23E EPS to derive a TP of INR 2,315. Maintain REDUCE, as there is limited scope for rerating.

Broad-based revenue growth: Overall revenue grew 35% YoY, while ex-GSK, revenue was up 21% YoY (-9% in 4QFY20 and +7% in 3QFY21). Home Care/BPC revenue grew by 15/20% YoY (-4/-14% YoY in 4QFY20). F&R (ex- GSK) grew by 36% YoY (F&R 96% reported). Health, Hygiene and Nutrition portfolio (80% mix) clocked sustained growth of 22% YoY (12% in FY21). Discretionary clocked +10% YoY growth (-15% in FY21) and OOH continued to recover, seeing 61% YoY growth (-26% in FY21). HUL's 87% portfolio gained penetration (similar trend in FY21), led by rural growth.

Resilient margins: Gross margin contracted by 117bps YoY (+142bps in 4QFY20 and -24bps in 3QFY21), impacted by unprecedented commodity inflation (especially in crude, palm oil, and tea). Home Care EBIT margin expanded by >200bps to 21% (all time high), led by healthy performance of premium portfolio. BPC EBIT margin was up by +266bps YoY (-291bps in 4QFY20) but failed to sustain sequentially (down 170bps QoQ). F&R margin was up by 380bps YoY. Employee/A&P/Other expenses grew by 47/21/18% YoY. EBITDA margin was up by 146bps YoY to 24.4% (-42bps in 4QFY20 and -87bps in 3QFY21). EBITDA grew 43% YoY (HSIE 46%).

Call takeaways: (1) Shikhar App (500k outlets) is transforming the experience of retailers; (2) Horlicks and Boost INR-2 sachets (20% cheaper) are driving penetration; (3) e-comm is the most profitable channel (comprising 5-6% of sales); (4) company is taking gradual price hikes despite steep inflation to sustain volume share; and (5) oral care is sustaining market share gain; (6) nutrition portfolio gained 370bps EBITDA margin; (7) lockdown impact is much lower than last year, (8) ETR 26% for FY22/FY23.

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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