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Hindustan Unilever - Q1FY22RU - First cut - YES SECURITIES

Posted On: 2021-07-23 04:06:16 (Time Zone: UTC)

Mr. Himanshu Nayyar, Lead Analyst - Institutional Equities, YES SECURITIES

Hindustan Unilever 1QFY22 Investor Call Takeaways

Presentation highlights

- Operating environment - Mobility index severely impacted in May at 37% recovering sharply in June to 75%, rural grew at 1.04x and urban at 0.96x of overall FMCG growth, sharp inflation continued in palm oil, tea and crude with prices at 1.3-1.7x of Mar 20 levels. (prices expected to remain higher than 2019 levels)

- Execution - Better agility and decisiveness given supply chain resilience (capacity increased by 30%) and recovery in both coverage and assortment 0.9x and 0.8x of pre-COVID levels.

- Continued impactful innovation and communication - Combining global know-how and local consumer insights to launch innovative products in multiple categories, coming up with purposeful promotions to increase consumer awareness on the pandemic.

- Digital initiatives - More than 10% total demand now captured digitally, Shikhar B2B app now at 5.5 lac stores, contribution up 6x yoy, e-commerce contribution up 2x yoy, exploring D2C segment via UShop.

- Financial performance - 80% business continues to gain penetration vs FY20, 9% volume growth and consumer revenue growth of 12%, margins down 110bps to 24% due to input inflation and higher A&P spends, adj. PAT growth of 5%, other income lower due to lower yields, expected tax rate for FY22 at 26%, premium portfolio grew 2x.

- Segmental growth - Home care growth of 12% led by fabric wash and personal care, BPC growth of 13% led by hair care and skin care, foods growth of 12% led by continued momentum in in-home portfolio; health, hygiene and nutrition portfolio (85% of business) grew 8%, discretionary portfolio (12% of business) grew 39% and OOH portfolio (3% of business) grew 91%.

- Price hikes - Skin cleansing, laundry and tea portfolio saw another round of price hikes to pass on RM inflation.

- GSK Business update - 50% GTM integration completed, 800 distributors of GSK now onboarded, direct coverage expanded by 40% yoy, all-India penetration of HFD category still at 25% so focused on market development, progressing ahead of planned cost synergies.

- Outlook - Expect strong recovery in discretionary segments, good monsoon should keep rural demand resilient, commodity prices to remain elevated, to be offset by cost savings and pricing actions, focus remains on balanced volume and value growth, consumer centric innovation, digital transformation, market development and success in high growth channels of eCommerce and GT.

Q&A highlights

- Tea business - Drove incremental market share gains in both volume and value in the tea business, judiciously managed tea inflation, expect some normalization in tea prices but see them remaining above FY20 levels, no intention to divest the business despite the parent company doing so globally.

- GSK reach and pandemic impact - Agree pandemic has delayed the distribution integration and market development/seeding initiatives, Hope to reach 2x direct reach post complete integration of GSK integration in next 2 quarters, some pipeline correction impact on 1Q sales given removal of one layer of sub-distributors, will help in increasing penetration significantly with sachets playing a key role.

- Volume value gap - Gap has come down to 3% from 5% last quarter despite price increases due to normalization of trade promotions in the quarter which were lower in base quarter, 2Q should be normal and therefore reflect the pricing actions being undertaken.

- Material inflation and price hikes- High commodity inflation in 3 large categories (tea, crude, palm) impacted gross margins, while prices should eventually come down, strong pricing power will help protecting margins, took 3% price hike in 1Q and future action will be dependent on future inflation.

- Margin outlook - See current 24% margins as healthy, have improved margins from 14% 10 years back indicating pricing power and business model strength, will keep balancing margins with objective of competitive volume growth.

- Rural demand outlook - Demand has remained resilient with rural markets leading recovery, smaller penetration and access packs continue do well across categories.

- Premiumisation trends - Premium portfolio grew at 2x company growth rate, should do even better with mobility improving and discretionary portfolio recovering, so signs yet of downtrading.

- E-Com and D2C channel - E-commerce business has doubled led by better assortments and consumer preference, both premium brands Lakme and Indulekha doing well on D2C channel.

- GSK synergies journey - Ahead of planned cost synergies, focusing on reinvesting additional savings back into the business; integration about to be complete but synergy benefits on manufacturing, marketing etc will take more time.

- Competitive intensity in tea, soaps and laundry - Have gained market share in all 3 categories despite significant price hikes given robust supply chain and distribution.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs. 2378.65 as compared to the previous close of Rs. 2433.9. The total number of shares traded during the day was 116564 in over 10184 trades.

The stock hit an intraday high of Rs. 2506.5 and intraday low of 2376.05. The net turnover during the day was Rs. 285117519.

Source: Equity Bulls

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