HUL’s underperformance of ~60% vs the Nifty over March 2020-April 2022 may be potentially interpreted as the stock already factoring in most of the concerns: (1) rural slowdown-led demand pressure, (2) inflation woes and (3) D2C-led premiumisation challenges (reality and narrative). Technically speaking, some part of the underperformance may also be due to the absorption of GSK’s block stock sale in May 2020.

Upside triggers: (1) Large players (in commodity sensitive categories) are beneficiaries of inflation in the medium term (operating leverage, opportunity to have some ‘price retention’ benefits (in the commodity deflation cycle), ability to play the portfolio and accelerate volume share gains), (2) increasing probability of turnaround in nutrition (Horlicks, Boost), (3) likely improvement in rural incomes by 2HFY23, and (4) opportunities for bolt-ons (link).

HUL has seen a long period of underperformance: HUL has underperformed the broader market by ~60% over Mar’20-April’22 (pre-Covid levels). Also, it has corrected by ~20% from its recent peak in September 2021.

Near-term demand pressures – a known reality: We believe near-term demand concerns are well appreciated by consensus and it’s not an incremental negative (read low probability of further earnings cut, in our opinion). The demand slowdown in rural markets with commentary of downtrading and volume decline by FMCG companies is the (accepted) base case for consensus for FY23, in our opinion.

Large players are beneficiaries of inflation in medium term: Over the last few years, we have witnessed large players benefit from dual tailwinds of formalisation and consolidation. While formalisation (shift from unorganised to organised) has aided growth for consumer companies (for quite some time), we believe it is now coupled with consolidation as well (large players outperforming). We believe the gains for the larger players are on the back of (1) companies prioritising market share gains amidst high inflationary pressure and (2) ability to navigate emerging trends.

Valuation and risks: We cut our earnings estimates by ~10% for FY23-24E; modelling revenue/EBITDA/PAT CAGR of ~13 (%) over FY2022-24E. Maintain ADD rating with a DCF-based revised target price of 2,450 (earlier, it was2,500).