Maintain REDUCE on HUL - In-line result; margins disappoint - HDFC Securities

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

HUL (Q1FY21 Results Review) | In-line result; margins disappoint. Maintain REDUCE

HUL clocked revenue growth of 4% YoY, primarily led by the GSK acquisition. Its domestic consumer business (ex-GSK) saw a decline of 7% YoY. Growth in the Hygiene & Nutrition business (80% mix) was resilient at 6% YoY, while discretionary (15% mix)/OOH (5% mix) declined by 45/69% YoY. Gross margin dipped 222bps YoY, despite GSK being GM accretive and soft crude basket. However, cost management initiatives supported the EBITDA margin. The company saw sequential improvement in demand in May and June, but overall sentiment remains weak on account of job losses and return of lockdowns in several states. The Discretionary and OOH categories are expected to remain weak in FY21. We maintain our below-consensus EPS estimate for FY21/FY22/FY23. We value HUL at 50x P/E on Jun- 22E EPS and derive a target price of Rs 2,016. Maintain REDUCE on a muted absolute growth trajectory and unfavourable risk-reward.

Slight revenue beat: Revenue grew by 4% YoY (+7% in 1QFY20 and -9% in 4QFY20) vs the estimate of +1% YoY. LTL domestic consumer business (ex- GSK) saw sales dip by 7% YoY (vs our estimate of 9% YoY decline) due to an 8% YoY volume decline. Home Care/PC witnessed a revenue decline of 2/12% YoY, while F&R grew by 51% YoY. Ex-GSK, F&R declined 4% YoY. GSK saw 5% YoY growth.

Weak gross margin, in-line EBITDA margin: The gross margin dip of 222bps YoY (flat in 1QFY20 and +142bps in 4QFY20) was higher than our expectation (+96 bps, on account of adverse product mix and raw material inflation. Employee/other expenses grew 31/19% YoY while A&P dipped 31% YoY, leading to the overall EBITDA remaining flat YoY (+18% in 1QFY20 and -11% in 4QFY20), in line with our estimates. EBITDAM dipped by 113bps YoY. LTL EBITDA margin dipped by 170bps YoY. However, the company saw a benefit of 60bps YoY from GSK. EBIT margins for Home Care/PC dipped by 139/152bps YoY while F&R margin expanded by 24bps YoY. Lower tax rate led to APAT growth of 7% YoY (+12% in 1QFY20 and - 2% in 4QFY20) vs estimate of +9% YoY.

Call takeaways: (1) Management is currently uncertain about sustainable rural recovery; (2) Q1 Sales saw the benefit of ~6% distributor up-stocking indicating weak consumer offtake; (3) the company saw 80% of the portfolio gaining market share; (4) foods (organic) growth was in double digits; (5) Capex plan for the next year remains unchanged.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2319.1 as compared to the previous close of Rs. 2330.35. The total number of shares traded during the day was 117262 in over 6661 trades.

The stock hit an intraday high of Rs. 2350 and intraday low of 2308.65. The net turnover during the day was Rs. 272682050.

Source : Equity Bulls

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