GST-driven price cuts are likely to sustain volume growth and provide a buffer against input cost inflation; TP rises to 1,530
HUL’s Q3FY18 earnings grew 30% y-o-y, marginally ahead of our estimates, while volumes grew 11%, higher than expectations. Volume growth of 11% came on a very weak base of 4% decline in Q3FY17 which was impacted by demonetisation. However, this marks an improvement in trend as the two-year volume CAGR moved to 3.2% this quarter compared to 1.5-2% in the last few quarters. We expect this trend to sustain going ahead as GST rate cut has driven price cuts and grammage increases kick in. Ebitda grew 24% y-o-y driven by gross margins. This was despite ad spends sharply increasing by 25% y-o-y, which implies HUL continues to invest in innovations to drive future growth. Management soundeds confident on continuing the aggressive cost reduction programme which saved 6% of sales as costs in 2017. This is critical, given the rising input cost pressures due to crude. Maintain Outperform on HUL, target price increases to Rs 1,530 (from Rs 1,500) on roll forward. We expect the GST driven price cuts to stimulate volume growth and also provide a buffer to mitigate input cost inflation.
Volume growth of 11% marks a gradual improvement in trend: HUL’s Q3FY18 volumes grew 11% y-o-y which was above our expectations of 8%. This came on a very weak base of 4% volume decline in Q3FY17. The better metric to look at would be the two-year volume CAGR which was 3.2%. This marks an improvement over the two-year CAGR of 1.5-2% in 1H FY18. However, the demand is still well below the 5-6% volume growth HUL delivered in FY16. GST rate cut driven price drops should lead to volume uptrend sustaining: The GST rate cuts in November were in categories like detergents, skin creams and shampoos, which HUL has passed on in terms of price cuts or higher grammages. This should lead to a volume uptick which will flow through from Q4FY18 onwards.
Margin expansion continues: Reported Ebitda margin expanded 215 bp y-o-y. As this has a component of accounting post GST, the better metric to look at is the Ebitda growth of 24% y-o-y. This was driven by gross margin expansion. Home care Ebit grew 51% y-o-y and contributed 62% of the incremental Ebit change for HUL. Input pressures building up: HUL had started its aggressive zero-base budgeting cost initiatives in Q4FY17, and thus, the base of margins is not low anymore. There is also a challenge of rising input costs. However, management sounded confident on continuing the cost savings programme. Proactive steps to comply with anti-profiteering: HUL took a very proactive step by disclosing to the tax authorities an amount of Rs 1.19 bn, which was again due to the time it took to pass on price cuts to consumers after the GST rates had been cut in November.