Hindustan Unilever - Company Update - Squeezed from all fronts: BUY with moderate expectations

Mr. Amnish Aggarwal, Director - Institutional Equities at Prabhudas Lilladher

Quick Pointers:

- HUL's categories reported flat sales and high single digit decline in volumes in Jan/Feb in comparison to 3Q22

- Slowdown is wide spread, rural has been impacted more even as full impact of inflation and Russia Ukraine crisis is yet to play out fully

We are cutting HUL's EPS estimates by 2.3/8.2/6.1% for FY22/23/24 and DCF based target price to Rs2356 (Rs2900 earlier). This follows impact of 1) deepening slowdown in demand in rural and urban India 2) likely hit on margins in 1H23 as the impact of Ukraine Russia crises plays out on commodity prices 3) increase in overall inflation led by higher food and fuel prices which could impact medium term demand scenario and 4) increase in risk free rate for DCF from 6% to 6.8% in rising interest rate scenario.

We believe that this phase is transitionary and structural story is intact as 1) HUL continues to gain share in key product categories and organized players gain more during times of high inflation 2) HFD segment is likely to emerge as a key driver of growth led by distribution led gains and small packs and 3) sustained innovation across categories and distribution gains from strategies like WIMI and SHIKHAR will play out in long term.

However, we expect 1H23 to be challenging due to twin impacts of poor demand and high input cost inflation. We expect 10.5% Sales and 13.9% PAT CAGR over FY22-24. HUL trades at 42.9xFY24 EPS (49.3xFY24 at target price) which not only shows impact of near term growth/margin pressures but also sectoral shift in fund allocations. While 2% dividend yield and strong balance sheet protect downside, expect back ended and moderate returns in current environment. Maintain BUY.

Key Takeaways:

- Demand trend remains weak: 3rd covid wave subsided, without much impact. Rural demand has further slowed down vis-à-vis 3Q as farmgate prices have not increased in line with costs (fertilizers/ fuel). Near term outlook looks weak as the full impact of increase in global crude prices and inflation is yet to be fully reflected. Urban demand has also seen slowdown across categories, although at a pace lower than rural.

- Nielsen shows demand pressures - Nielsen data suggests high-single digit volume decline and flattish value in HUL's categories in both Urban India and rural India with rural being more impacted. Amongst all the categories, beauty (skin and hair care) is impacted more while laundry and Nutrition sales have also been impacted.

- Inflationary pressures like never before: Raw material basket has seen unprecedented inflation in Palm oil (50% YoY), crude oil (20% QoQ), coffee, packaging and other inputs. The Russia-Ukraine crisis has further led to inflationary pressures in cereals, barley, pulses etc. the impact of which is yet to be reflected in product prices given inventory. HUL has undertaken calibrated price increase in Laundry, Skin cleansing, coffee, Skin care ad hair care etc.

- Sustained market share gains: HUL continues to improve its competitiveness across categories and has seen its market share improve in most of its product categories.

- Investment in advertising: The company is investing in advertising to ensure the health of the brand and consumer franchise. Advertising intensity remains at the level of 3Q22.

Shares of Hindustan Unilever Limited was last trading in BSE at Rs. 1978.75 as compared to the previous close of Rs. 1993.80. The total number of shares traded during the day was 214297 in over 22123 trades.

The stock hit an intraday high of Rs. 2017.00 and intraday low of 1976.00. The net turnover during the day was Rs. 426410743.00.

Source : Equity Bulls

Keywords

HindustanUnilever INE030A01027 HUL CompanyUpdate PrabhudasLilladher