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Hindustan Unilever Rating: Buy- FY22 saw decadal-high mkt share gains

Gross margins to be under pressure, but cost control, portfolio mix and price hikes to help firm; ‘Buy’ retained

HUL’s premium portfolio surpassed the rest of its portfolio in FY22 – liquid detergents and fabric conditioners, now an Rs 17-bn business, grew 4x in the last five years.
HUL’s premium portfolio surpassed the rest of its portfolio in FY22 – liquid detergents and fabric conditioners, now an Rs 17-bn business, grew 4x in the last five years.

Despite macro-economic drags being a mainstay in the past year, HUL’s FY22 annual report showcased decadal-high market share gains across its portfolio. HUL not only took sharp price hikes but also gained ground. Amid the pandemic, the online channel grew in prominence; HUL intends to tap into this channel further. HUL’s premium portfolio surpassed the rest of its portfolio in FY22 – liquid detergents and fabric conditioners, now an Rs 17-bn business, grew 4x in the last five years.

Gross margin is likely to remain under pressure in the near-term. However, an improving portfolio mix, cost control and price hikes should work in HUL’s favour. Retain ‘Buy’ with a TP of Rs 2,785.

Digital focus
20% of HUL’s demand is registered digitally. The company now has D2C websites for its premium brands like Lakme, Indulekha, Simple. Lakme, which attracts 30% of its business digitally, is the most followed Indian beauty brand on Instagram. HUL continues strengthening its play in Masstige beauty. It now has three fully-operational digital-first brands – Simple, Love Beauty & Planet, and Baby Dove.

HUL is investing in technology-driven commerce with capabilities such as Virtual Try-on and Artificial Intelligence (AI) Skin Analyser. Its Shikhar app has registered 0.8mn stores, enabling zero-touch online ordering. This solves the two big challenges that retailers face – capital and space.

Market share gains
Liquid detergents and fabric conditioners have grown 4x over the past five years. Since its acquisition in 2016, Indulekha has grown 6x over the past six years. Surf excel is now the biggest laundry brand. HUL’s market share in hair care touched a 15-year high in 2021. Clinic Plus, Dove and Sunsilk were rated as the top-three hair care brands in India.

Outlook: On a firm footing
HUL leads 90% of its portfolio categories and is gaining share in 75% of the portfolio. It has ample room to ‘premiumise’ and boost per-capita consumption in higher-penetration categories. New product offerings in foods, viz. Hellmann’s Mayonnaise/ Kissan Peanut Butter, are gaining traction with consumers. Further, HUL has i) 100 PhD scientists working across three R&D centres in India; and ii) access to the works of 5,000 people in the global R&D function at Unilever.

Versus 2019, HUL’s products are now twice as superior.

HUL was impacted due to restricted mobility during the pandemic. The company would continue taking price hikes judiciously. Near-term compression in margins, especially in Q1FY23E, owing to higher crude oil prices, remains a key risk. We maintain ‘BUY/SO’ on HUL.

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