Hindustan Unilever Rating ‘Buy’; Ebitda was slightly ahead of estimate

Volume growth was weak; near-term outlook clouded due to demand and RM headwinds; recovery likely in FY23; ‘Buy’ retained

While weak volume growth and RM inflation is a headwind in the near term, HUL should deliver 16% EPS CAGR over FY22-24e.
While weak volume growth and RM inflation is a headwind in the near term, HUL should deliver 16% EPS CAGR over FY22-24e.

Faced with a tough macro, decline in industry volumes in rural and high RM inflation, HUL clocked an in-line 2% volume growth. Product price hikes, to offset input price pressure, drove revenue growth to double digits. Ebitda margin improved, driving 15% Ebitda growth, a slight beat. The near-term outlook is clouded by weak consumption trends and stiff RM cost inflation, but we expect a recovery in revenue & earnings growth in FY23, led by multiple factors. Buy.

Slight Ebitda beat: HUL’s Q3 Ebitda grew 15% y-o-y, which was slightly better than our estimate (+12%). While underlying volume growth was in line at 2% y-o-y, realisation growth was slightly better at ~9%. This, along with lower-than-expected ad-spends (-14% y-o-y), was the key driver for the slight beat. 2Y volume grew 3% CAGR, while revenue growth stood at 9%. Grammage reductions in price point packs had a 2ppt impact on volume growth (c.30% are LUPs for HUL).

Portfolio: Growth was highest in home care (+23%; off a low base), led by double-digit growth in fabric wash. BPC grew 7%, with double-digit growth in skin cleansing (price-led) and skin care, even as oral care was soft. Foods growth was muted at 3%, given a high base. While y/y growth seems divergent, 2Y CAGR is fairly similar at 8-11% across the three segments.

Better q-o-q GM: GM recovered sequentially (+60bps q-o-q), albeit y-o-y decline remains high at >180bps. Sequential GM recovery was led by product price-hike and better mix (recovery in discretionary along with seasonality), even as RM pressures remain elevated and in fact, saw a further step-up in Q3. HUL’s unit material cost was 30% higher than FY20 levels in Q3 (vs. 25% inflation in Q2).

Ebitda margin: GM contraction was offset by lower ad-spends, which declined 2.7ppt y-o-y as a % of revenues. Management noted its media spends were competitive, with share of voice ahead of market share. Staff cost grew 18% y-o-y due to one-off pension provision and true-up of variable pay. Growth in other expenses was modest at 6%. Put together, despite GM dip, Ebitda margin expanded both q-o-q and y-o-y (+100bps) to 25% and drove 15% Ebitda growth.

Macro remains tough: Industry volumes were flat in urban and down y-o-y in rural India, as consumers titrate their purchases to combat high inflation. Value growth for the industry was at mid-single digits (vs. 11% for HUL), with urban outpacing rural. Volume performance is likely to remain subdued in the near term, and revenue growth would be more price-led. HUL expects govt support to spur up demand, particularly in rural India.

RM pressure, price hikes to continue: HUL is facing a further rise in RM prices in Q4 cf. Q3, led by palm, crude & packaging. This would require a further product price hike. Management expects to sustain Ebitda margins in a healthy range (we build flattish margins q-o-q).

Maintain EPS est: We largely retain our FY22-24e EPS estimates. While weak volume growth and RM inflation is a headwind in the near term, HUL should deliver 16% EPS CAGR over FY22-24e. Maintain Buy with an unchanged PT of Rs 2,900.

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