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Hindustan Unilever Rating: add; Simple strategy in a complex business

It is now producing high quality products with new-technology

Hindustan Unilever Rating: add; Simple strategy in a complex business
The premium portfolio now contributes ~33% of revenues vs ~22% in FY12 with >25% of demand being captured digitally.

FMCG major HUL’s analyst meet always gives the feeling of it being a complex business. However, this analyst walked away with higher visibility and confidence on its simple business model. It is now applying WIMI (winning in many India) at scale, produces high quality products (per it’s blind tests) in factories with new-tech and has an evolving sales system. It still is an employer of choice and has potential to accelerate M&A. Premiumisation continues to be the top agenda; we reckon margin gains will be reinvested for further category development.

The premium portfolio now contributes ~33% of revenues vs ~22% in FY12 with >25% of demand being captured digitally. It is one of the major drivers for ~1,000bps margin expansion over last 10 years. R&D capabilities of the company allow it to have superior product than competition in blind tests which is now 2x (number of brands) as compared to precovid. In beauty & personal care segment (BPC), HUL aspires to grow ahead of the market for its core with 2x growth in premium segment. In terms of channels, it aspires to grow 2x of the market in modern trade, pharma and cosmetics channel with 4x growth in e-commerce. Further, HUL plans to move their raw material basket for BPC business to other sustainable alternatives.

There is focus in category development of light moisturiser, BB/CC cream, Sunscreen, Body Wash and Intimate hygiene categories in BPC division for next decade. These categories have penetration levels in low single digits. It reached the highest shares in hair care in last two decades with +400bps market share gains in last three years. It is now 3x of its largest competitor. The premium beauty business unit (PBBU) has launched five digital first brands – Simple, Love Beauty and Planet, Baby Dove, AcneSquad and Find Your Happy Place. Premium laundry now contributes 52% of volumes of home care division in 2021 vs 31% in 2010. Mass laundry contributes 33% in 2021 vs 58% in 2010. Liquids portfolio is >`20 bn.

Home care division business of India is the largest in the world for Unilever. HUL through it three-pronged strategy has got clear market leadership with long term market share gains in tea category. HFD (health foods drinks) business has now 3x direct coverage, 1.3x numerical distribution and 11x e-commerce run rate in Sept’22 vs day 1 of acquisition. Category development activities has led to 177bps of penetration gains. The company launched Ready Mix Horlicks (with milk added) to solve for convenience as well as price.

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HUL is now plastic neutral (it collects more plastic than it uses in its products). Variable pay of CEO & MD Sanjiv Mehta has linkages to company’s ESG Goals. HUL has 44% gender diversity (for managerial workforce) which is expected to increase to ~50% in next couple of years. In terms of outlook, near term focus will be (i) growing ahead of market, (ii) buildback gross margins and (iii) Stepping up ad-spends. Long term focus will be towards (i) competitive growth ahead of the market (ii) modest margin expansion and (iii) efficient use of capital leading to double digit EPS growth. Maintain ADD rating with a DCF-based unchanged target price of `2,800.

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