Maintain REDUCE on Hindustan Unilever - In-line result; core categories remain slow - HDFC Securities

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

HUL posted a mixed result, with a marginal beat in revenue (3% vs 1% HSIE), but a slight miss in margins. UVG was at +1% (HSIE -2%). Home Care remained weak at 2% YoY decline as demand for fabric wash was sluggish (also impacted by price cuts). BPC recovered well but was flat after a sharp 12% YoY decline in 1QFY21. F&R clocked strong growth of 19% (ex-GSK), aided by in-home consumption. The company clocked double-digit growth in 80% of its portfolio, which indicates a strong recovery. GM contracted by 145bps YoY due to commodity inflation and adverse product mix. ASP saw a sequential increase as the company resumed investments. We expect a gradual recovery in core categories in 2HFY21. We maintain our below-consensus EPS estimate for FY21/FY22/FY23. We roll forward our target price to Sep-22E EPS and value HUL at 50x P/E to derive a TP of Rs 2,060. Maintain REDUCE on a muted absolute growth trajectory and limited scope for re-rating.

Slight revenue beat: Revenue grew by 16% YoY (+6% in 2QFY20 and +4% in 1QFY21) vs expectation of 15% YoY growth. Ex-GSK, revenue grew 3% YoY (HSIE 1%). Health, Hygiene and Nutrition portfolio (80% mix) clocked a strong growth of 10% YoY, discretionary (15% mix) and OOH (5% mix) declined by 25% each. The company has seen sequential improvement and expects better growth trajectory in 2HFY21. Rural growth is outperforming, and it is expected to sustain in the near term.

Margins in-line: Gross margin contracted by 145bps YoY (+251bps in 2QFY20 and -222bps in 1QFY21) vs expectation of +102bps YoY expansion. Headwinds through commodity inflation (especially in palm oil and tea) and adverse product mix impacted the margin. Home care/PC/F&R EBIT margin expanded by 278/34/63bps YoY. Employee/Other expenses grew by 30/16% YoY while ASP dipped by 5% YoY. However, ASP saw a sequential increase and the company is expected to ramp up its ASP in 2HFY21. EBITDA margin expanded by 28bps YoY to 25.1% (+293bps in 2QFY20 and -113bps in 1QFY21). EBITDA grew 17% YoY (HSIE 18%). PBT clocked 16% YoY growth while PAT grew by 9% YoY due to lower tax rate in the base quarter.

Call takeaways: (1) Demand for larger packs is higher in urban markets with a lower frequency of buying while rural markets are witnessing growth in smaller packs with a higher frequency of buying; (2) Volume growth stood at 1% in the core business; (3) Supply service levels returned to pre-COVID level, and the company does not expect any significant supply-led constraints; (4) 70% of the company's portfolio saw improved penetration; and (5) e-comm revenue mix doubled YoY.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2163.4 as compared to the previous close of Rs. 2172.1. The total number of shares traded during the day was 96636 in over 7113 trades.

The stock hit an intraday high of Rs. 2195.95 and intraday low of 2136. The net turnover during the day was Rs. 208900051.

Source : Equity Bulls

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