Rural weakness to continue but share gains, strong margins and recent underperformance merit an upgrade to ADD from Reduce
HUL delivered a resilient performance both on revenue and margins front despite the headwinds to rural demand and persistent material cost inflation. While volume growth looks soft at 2%, it was well ahead of industry growth which saw a decline, margin improvement despite the gross margin pressure was commendable. Resilient growth despite significant price hikes indicates the strong brand saliency and product superiority. We expect growth in the near-term to remain pricing and mix-led as volume growth should remain lackluster till inflation cools off and disposable incomes start increasing which is not expected till mid-CY22 as per the company. The nutrition business continues to show signs of picking up post the GTM integration and market development efforts from the company. Key positives were the decent recovery in discretionary categories, strong double-digit growth in fabric wash, hair care and skin care. We think this an appropriate time to upgrade our rating on the stock from Reduce to ADD as we believe the valuations have become favorable post recent correction and the company is well placed to tackle this transient inflation-led volume weakness period with strong margin levers and continued innovation and premiumization.
- Revenue - Revenue grew 10.4% to Rs130.9bn with moderation in domestic volume growth to 2% (2% impact of lower grammage in LUPs) with home care growth at 23%, BPC growth at 6.9% and foods growth at 3.3%.
- Margins - Gross margins improved 50 bps QoQ but declined 190bps YoY to 52.6% owing to continued inflation in input costs. Pricing/mix growth stood at 9% in Q3. EBITDA margin slightly ahead of expectation at 25%, higher by 40bps/90bps QoQ/YoY helped by timely price hikes and lower A&P spends.
- PAT - PAT growth of 17.6%YoY with PAT coming in at Rs23.1bn marginally ahead of our estimate of Rs22.7bn.
- Segmental growth - Home care growth of 23% led by laundry and dish wash, BPC growth of 6.9% led by premium beauty, hair care and skin care, foods growth of 3.3% due to lower market growth and disruption linked to sales integration; health, hygiene and nutrition portfolio (85% of business) grew 10%, discretionary portfolio (12% of business) grew 11% and OOH portfolio (3% of business) grew 39%.
We maintain our estimates and build in a revenue/EBITDA/PAT CAGR of 11%/13%/12% over FY21-24E. We reduce multiple to 52x (in-line with 5-yr average) on FY24E earnings to factor in lower volume growth and margin headwinds but upgrade from Reduce to ADD given recent underperformance with a revised PT of Rs 2,587. Despite growth concerns, we remain structurally positive on the company and recommend to keep adding the stock on any declines with a re-rating expected as soon as inflation starts cooling off.Link to the report
Shares of Hindustan Unilever Limited was last trading in BSE at Rs. 2322.20 as compared to the previous close of Rs. 2261.60. The total number of shares traded during the day was 118908 in over 11323 trades.
The stock hit an intraday high of Rs. 2333.05 and intraday low of 2250.60. The net turnover during the day was Rs. 272913686.00.
Source : Equity Bulls