Maintain REDUCE on Hindustan Unilever - A mixed bag, focus on strengthening the core - HDFC Securities

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

HUL posted a mixed result, with revenue/EBITDA growth of 20/17% (HSIE 18/19%). Ex-GSK, revenue grew by 7% YoY with UVG of 4% YoY (in-line). The company saw a recovery in demand for discretionary as well as OOH categories and revenue pressure eased out. Health, Hygiene and Nutrition (80% mix) continued to deliver strong double-digit growth, supported by new launches and price hikes. Market share gains in e-comm (market share above pre-COVID level) and strong rural growth (2x YoY) drove revenue growth. Nutrition portfolio (GSK) posted double-digit growth, and supply issues are over. High commodity inflation impacted GM, despite an improved product mix. A&P expenses returned to growth as the company resumed investments. We expect a sustained recovery in the discretionary portfolio along with growth acceleration in nutrition portfolio. We maintain our EPS estimates for FY21/FY22/FY23. We value HUL at 52x P/E on Mar-23E EPS to derive a TP of Rs 2,315. Maintain REDUCE, as there is limited scope for re-rating.

Discretionary continues recovery: Overall revenue grew 20% YoY (HSIE 18%) while ex-GSK revenue was up 7% YoY (+4% in 3QFY20 and +4% in 2QFY21). BPC/F&R (incl GSK) grew by 10/80% YoY (F&R 19% ex-GSK) while Home Care dipped by 1% YoY. Health, Hygiene and Nutrition portfolio (80% mix) clocked a sustained growth at 10% YoY, while discretionary (-1% YoY) and OOH (-15% YoY) continued to recover. The company has seen sequential improvement and expects growth to sustain.

Rural growth is outperforming, and it is expected to sustain in the near term.

Slight miss in margins: Gross margin contracted by 24bps YoY (+44bps in 3QFY20 and -145bps in 2QFY21) vs an expectation of 52bps YoY contraction. Unprecedented commodity inflation (especially in crude, palm oil and tea) impacted the margin, despite an improving product mix. Home care/BPC EBIT margin expanded by 75/81bps YoY while F&R margin contracted by 381bps YoY. Employee/A&P/Other expenses grew by 23/19/28% YoY. Ad spends by the company were competitive, and it retained the highest share of voice. EBITDA margin contracted by 87bps YoY to 24.1% (+352bps in 3QFY20 and +28bps in 2QFY21). EBITDA grew 17% YoY (HSIE 19%). PBT clocked 13% YoY growth while PAT grew by 19% YoY.

Call takeaways: (1) 86% of the portfolio gained penetration during the quarter; (2) Horlicks and Boost saw double-digit growth, led by large packs (>500gm); (3) e-comm growth rate as well as revenue mix doubled YoY; (4) skin cleansing, skincare and tea saw improved growth within the premium segment; and (5) the company remains focused on driving innovation across categories.

Shares of HINDUSTAN UNILEVER LTD. was last trading in BSE at Rs.2303.6 as compared to the previous close of Rs. 2390.75. The total number of shares traded during the day was 544052 in over 17571 trades.

The stock hit an intraday high of Rs. 2410.45 and intraday low of 2290.15. The net turnover during the day was Rs. 1282965765.

Source : Equity Bulls

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