Maintain REDUCE on Hindustan Unilever - Steady performance continues - HDFC Securities

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

HUL results were a mixed bag, with revenue growth at 12.7% YoY (HSIE 11.4%) and EBITDA growth at 7.7% (HSIE 8.5%). The consumer business revenue grew by 12% YoY (2% two-year CAGR) with UVG of 9% YoY (flat two-year CAGR). The health, hygiene and nutrition portfolio sustained healthy growth (8% YoY), with its mix increasing to 85%, from 80%. Market share gains continued, well supported by strong rural and sustained momentum in e-commerce (the most profitable channel for HUL). The nutrition portfolio is seeing GTM integration (50% completed); it clocked mid-single digit volume growth (gaining penetration sequentially). High commodity (crude, palm oil and tea) inflation and gradual price hikes compressed the gross margin by 139bps YoY. The company has taken 3% price hike to offset margin pressure. We expect HUL to deliver sustained recovery in the discretionary portfolio and accelerate growth in the nutrition portfolio. We maintain our EPS estimates for FY22/FY23 and value HUL at 55x P/E on Jun-23E EPS to derive a TP of INR 2,475. Maintain REDUCE.

Broad-based growth continues: Total revenue grew 12.7% YoY, with home care/BPC delivering 12/13% (5/0% two-year CAGR). The consumer business saw 12% YoY growth with volume growth at 9%. The health, hygiene and nutrition portfolio grew 8% YoY (16% over Q1FY20). Discretionary clocked 39% YoY growth (-24% over Q1FY20) and OOH saw 91% YoY growth (-40% in Q1FY20). Rural continued to be resilient, which is expected to sustain.

Compressed margins: Gross margin contracted by 139bps YoY (-222bps in Q1FY21 and -117bps in Q4FY21) due to unprecedented commodity inflation. Home care EBIT margin contracted by 134bps to 17.4%. The BPC EBIT margin, at 28.1%, remained flat YoY (-152bps in Q1FY21) and was up 62bps QoQ. The F&R margin was down 160bps YoY. Employee/A&P/other expenses grew by 4/28/6% YoY. EBITDA margin was down 114bps YoY to 23.9% (-113bps in Q1FY21 and +146bps in Q4FY21). EBITDA grew 8% YoY (HSIE 8.5%). We expect margin recovery in the remaining quarters of FY22.

Call takeaways: (1) The company saw market share gain across all three segments, including its premium products. (2) The e-commerce business has now doubled, with ~10% of the company's business being driven by digital platforms. (3) Acquired business (GSK) synergy is being reinvested, as of now, with further scope for margin improvement. (4) Horlicks and Boost INR- 2 sachets continue to drive rural penetration. (5) We expect current EBITDA margin to sustain for FY22. (6) GTM integration for nutrition business (GSK) reached 50%, and management expects it to reach 80-90% by Sep-end. (7) >80% business is gaining penetration. (8) Rural is at 1.04x of the FMCG sector growth, while urban is at 0.96x.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs. 2359.25 as compared to the previous close of Rs. 2378.65. The total number of shares traded during the day was 66151 in over 9949 trades.

The stock hit an intraday high of Rs. 2391.25 and intraday low of 2355.9. The net turnover during the day was Rs. 156738713.

Source : Equity Bulls

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