Hindustan Unilever - Prioritising (volume) growth over (gross) margins is a significant trajectory shift - ICICI Securities

A potential change in stance at HUL in favour of volume growth, in our opinion, could be a key driver for HUL stock's outperformance in CY2021. We note that this strategy has already started playing out in tea (price hike lower than competition and commodity inflation), soaps (price hikes lower than competition despite steep input inflation (palm prices up over 30% in 6M) and detergents. In India, a "growth market", investors tend to (rightly) ignore short-term profit sacrifice, provided the trajectory of volume outperformance is clear (as it's DCF-accretive). Nestlé stock's 43% outperformance between Oct'18 - Sep'19 driven by volume growth-led valuation rerating, despite weak earnings, is a case in point.

We are amending our FMCG portfolio strategy recommendation of Godrej, Marico, Dabur, Tata Consumer over HUL (post HUL's 26% underperformance (versus Nifty) over last 6 months). ADD retained.

HUL's comment in Q2FY21 call:

"I think the right thing for us to do is to focus on competitive volume-led growth. And if it means that some of the margin expansion is not at the desired levels or the levels we would like to be, itis absolutely okay with us. We will invest to drive growth."

- Focus on volume growth, even at the cost of margin pointing to a trajectory change: We believe that HUL is likely at the cusp of a period of volume growth acceleration - even if that means sacrificing gross margins to an extent. We note HUL's comments in Q2FY21 earnings call stating the change in thought process. This strategy is already playing out in tea and soaps, where HUL has taken a much lower price hike versus competition and versus commodity inflation, in a bid to gain market share. Even in detergents, HUL has been quick in passing input cost benefits, again ahead of competition.

- Nestle had outperformed peers over Oct'18 to Sep'19 period driven by P/E multiple expansion: Recently, over a 12-month period (Oct'18 - Sep'19), Nestlé's stock significantly outperformed peers (see figure 2). However, during this period, Nestlé's earnings growth significantly lagged peers - a strategic move by Nestle to delay price increases offsetting diary inflation, thereby driving volume growth at the expense of profitability. We believe that in India, a "growth market", investors tend to ignore short-term profit sacrifice, provided the trajectory of volume outperformance is clear.

- Revenue growth could accelerate while peers are likely to decelerate in FY22: We note that HUL's revenue growth in FY22 could accelerate, given a weak base of FY21, while peers are likely to witness moderating growth in FY22. Having said that, we do believe consensus should consider 2-year CAGR while comparing the performance in FY22 (adjusting for base effect of FY21).

- Valuation and risks: Our earnings estimates are largely unchanged; modelling revenue / EBITDA / PAT CAGR of 12 / 16 / 19 (%) over FY2020-22E. Maintain ADD rating with DCF-based unchanged target price of Rs2,400. Key downside risks are delayed recovery in demand and irrational competition.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2260.05 as compared to the previous close of Rs. 2255.75. The total number of shares traded during the day was 48091 in over 4436 trades.

The stock hit an intraday high of Rs. 2278.3 and intraday low of 2240. The net turnover during the day was Rs. 108586531.

Source : Equity Bulls

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