PL Stock Report: Hindustan Unilever (HUVR IN) - Q2FY24 Result Update – Volume recovery remains elusive - HOLD
Hindustan Unilever (HUVR IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.
Rating: HOLD | CMP: Rs2,548 | TP: Rs2,786
Q2FY24 Result Update – Volume recovery remains elusive
Quick Pointers:
♦ 2Q24 volumes up 2%, expect gradual recovery amidst rising competition
♦ 3Q outlook is favourable with lower inflation, stable pricing & festivial season
We cut FY24/25 EPS by 0.9%/2.1% factoring in 1) sustained pressure on volumes 2) lower pricing element to support growth & ward off competition from local/regional players and 3) marginally higher tax rates. HC & BPC (75% of sales) continue to grow volumes in mid-single digits while F&R is under pressure due to downtrading and volatile commodity prices. Rural volumes continue to improve (on low base) supported by easing inflation, higher job participation & govt thrust towards capex. While long term growth story led by lower penetration and superior value proposition remains intact, near term growth challenges seems likely. We factor in GM/EBITDAM expansion of 520/120bps over FY23-26 as benefits of lower RM will be partly neutralized by higher spends on advertising, royalty and lower operating income due to closure of marketing agreement with GSK Asia (Eno, Iodex, Crocin and Sensodyne). We estimate CAGR of 8.3% in sales and 8.4% in PAT over FY23-26 and assign a DCF based target price of Rs2786 (Rs2837 earlier). HUL has been flat from last 2 years and offers moderate returns. Sharp increase in crude based inputs is a key risk to our estimates. Retain Hold.
2Q Volumes up 2%, sales up 3.6%: Revenues grew by 3.6% YoY to Rs152.8bn (PLe: Rs155.6bn). Gross margins expanded by 692bps YoY/282bps QoQ to 52.7% (PLe:50.2%). EBITDA grew by 9.4% YoY to Rs36.9bn (PLe: Rs35.9bn). A&P Expenses grew by 65.2% YoY to Rs17.2bn. Adj PAT grew by 1.2% YoY to Rs26.7bn (PLe: Rs25.6bn). Home Care revenues grew by 3.3% YoY; EBIT grew by 11.9% YoY; while margins expanded by 145bps YoY to 18.7%. Personal Care revenues grew by 4.5% YoY; EBIT grew by 13.3% YoY; while margins expanded by 211bps YoY to 27.2%. Food & Refreshment revenues grew by 2.6% YoY; EBIT declined by 3.2% YoY; while margins contracted by 112bps YoY to 18.7%. Others revenues grew by 4.1% YoY; EBIT grew by 29% YoY; while margins expanded by 819bps YoY to 42.4%. Board declares an interim dividend of Rs18/share.
Concall Takeaways: 1) Demand trends remained stable and remain similar to 1Q24 2) MT & large packs are leading growth as volumes have grown by 2% in 2Q 3) Competitive intensity remains elevated for the FMCG industry with many smaller/regional players reentering the tea & detergent bar categories 4) Rural demand has improved with 2 year CAGR at -1% (vs -4% in 1Q). 5) Volumes to further pick up over the course of the year 6) Near term outlook remains favorable with lower inflation, festival days in 3Q24 and stable pricing 7) Price growth expected to be marginally negative with current commodity prices 8) Media intensity is 20% higher vs last year & ad spends have continued to inch up to 11.3% from 7.1% in in 2Q23 9) HFD saw mid-single digit growth due to activations & innovations. Pre-acquisition margins of 31% included marketing agreement with GSK Asia 10) Long term focus would remain on driving profitable volume led growth by innovation and premiumization 11) Tax rates for FY24 expected to be 26.5%