PL Stock Report - Hindustan Unilever (HUVR IN) - Q1FY23 Result Update - Slow volume recovery, EPS cut 5.3/4.8%: Hold - Downgrade to 'HOLD'

Hindustan Unilever (HUVR IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs2,700 | TP: Rs2,775

Q1FY23 Result Update - Slow volume recovery, EPS cut 5.3/4.8%: Hold

Quick Pointers:

♦ 1Q24 volumes up 3%, expect gradual recovery amidst rising competition

♦ Weather variations remain key determinant for near-term growth

We cut our FY24/25 EPS by 5.3%/4.8% and rating to HOLD factoring in 1) tepid volume growth in 1Q in F&R and Personal wash 2) waning impact of pricing as HUL cuts prices to ward off competition from local/regional players and 3) higher tax rates (26% v/s 24.5% earlier). Although 73% of sales (HPC) are growing volumes in mid-single digits, market dynamics & trade and consumer inventory will enable gradual increase in volume growth. Although rural markets appear to have bottomed out, erratic weather conditions can increase inflation in daily use items and impact volume recovery.

Although long term growth story led by lower penetration and superior value proposition remains, near term pressure on growth can’t be ruled out. We expect GM/EBITDAM improvement of 460/100bps over FY23-25 as benefits of lower RM will be partly neutralized by higher ad spends, royalty and lower operating income due to closure of marketing agreement with GSK Asia (Eno, Iodex, Crocin and Sensodyne) post Oct23. We estimate 8.7% Sales and 9.3% PAT CAGR over FY23-25 and assign a DCF based target price of Rs2775 (Rs2825 earlier). HUVR trades at 53.1xFY25 EPS. Downgrade to Hold.

1Q Volumes up 3%, sales up 6.1%: Sales grew by 6.1% YoY to Rs151.5bn (PLe: Rs155.6bn). Gross margins expanded 256bps YoY/120bps QoQ to 49.9% (PLe:50.0%). EBITDA grew 8.4% YoY to Rs35.2bn (PLe: Rs36.9bn). A&P Expenses grew 11.5% YoY to Rs14.8bn. Adj PAT grew by 9.2% YoY to Rs25bn (PLe: Rs26.7bn). Home Care revenues grew 10% YoY; EBIT grew by 14% YoY; while margins expanded by 64bps YoY to 18.3%. Personal Care revenues grew by 4.4% YoY; EBIT grew by 4.3% YoY; while margins contracted by 2bps YoY to 26.3%. Food & Refreshment revenues grew 4.7% YoY; EBIT grew 17.8% YoY; margins expanded by 200bps YoY to 17.9%. Others revenues declined by 7.1% YoY; EBIT declined by 7% YoY; while margins expanded by 7bps YoY to 36.9%.

Concall Takeaways: 1) Urban growth continues to outperform rural markets 2) Rural markets have bottomed out and volumes have grown by 2% in 1Q 3) Competitive intensity has increased for the industry with many regional players reentering the categories 4) commodity inflation has moderated but remains elevated vs historical levels 5) Volumes to pick up over the course of the year as 2-3 quarters are required to stabilize consumer prices 6) Volumes were also impacted by trade destocking as a result of price corrections 7) Volume & value mix to rebalance at 60:40 as a result 8) Price growth expected to be flat to marginally negative with current commodity prices 9) Ad spends have continued to inch up to 9.8% from 7.1% in in 2Q23 10) Management remains confident of HFD portfolio as market development & penetration will lead growth over medium to long term 11) Long term focus would remain on driving profitable volume led growth by innovation and premiumization 12) Tax rates for FY24 expected to be at 26%

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