Neither fair nor lovely

Hindustan Unilever’s volume growth, which has halved in the last four quarters and is the lowest for the last three years, is indicative of the increasing pain points in the existing portfolio. To add to this, the new product pipeline is capped to “Unilever” categories which prevent ‘Indianisation’. We believe this will result in the innovation funnel drying up, thereby making it harder for HUL to achieve relevant volume growth in the long term.

Further, the royalty increase restricts any benefits of margin expansion that the company would enjoy in the coming years and in the process suppress profitability. We believe lack of incremental growth drivers in the product portfolio, the royalty overhang and moderated profit growth outlook will take its toll on valuations. We downgrade HUL to ‘underperform’ with a target price of R442.

The pressure is evident: We believe the pain points emerging in the core portfolio will keep volume growth at mid-single digits in the coming quarters and HUL will have to focus on expanding its innovation funnel to compensate for the same.

Fair and Lovely, HUL’s largest skin care brand constituting around 4% of the company’s sales, has been witnessing pressure on the increase in sachet pricing. Our sense is the brand has witnessed a volume de-growth during the quarter, the sachets de-growing by double digits in volume. Our sense is the company will take some time before it can revive growth in this important brand and till then

... contd.