Overall results met estimates; margins likely to be under pressure; FY22-24e EPS cut marginally; ‘Buy’ retained
HUL managed to meet our (& consensus) forecast, but the quality of the result was inferior as underlying volume growth at c.4% was lower than forecasted 6-7%. GM contracted although cost control measures arrested the impact at Ebitda level. Management sounded concerned on input price inflation and product price hikes would likely be calibrated. However, we expect HUL to benefit from a pick-up in economic activity ahead and retain our Buy rating with 12M view.
Volume miss: HUL’s Q2 revenue grew 11% y-o-y, which was in line with our estimates. However, the composition was different with lower-than-expected volume growth at c.4% while pricing growth was much higher at c.7%. On a 2Y basis, volume CAGR was at 2.5%, an acceleration from near-flattish trend in Q1.
Discretionary recovers: Discretionary portfolio (c.12% of revenue) grew 31% y-o-y, while out-of-home (3% rev. share) grew 74% y-o-y off a low base. Growth for the rest of the business, comprising health, hygiene & nutrition was moderate at 7% y-o-y signaling weak volume perference in several product segments. On a 2Y basis, discretionary is now nearly back to pre-Covid levels while out-of-home grew >15%.
Rural slowdown: HUL flagged a slowdown in rural growth in Aug/Sep for the FMCG industry as per Nielsen data. While its own rural performance has been robust, HUL is cautiously optimistic on demand as it monitors normalisation of economic activity, onset of winter and impact of inflation.
GM pressure: After declining >3.5ppt over the previous two quarters, GM saw a sequential expansion (+110bps q-o-q) to 50.8%, aided by price hikes, mix improvement and moderation in tea prices. On a YoY basis, GM however declined >150bps. Input prices remain firm with palm, crude and packaging materials seeing sustained inflation. This is further exacerbated by a spike in freight costs (ocean freight up >5x). HUL expects GM to remain under pressure in the near term, which would require continued pricing action.
Ebitda margin: GM pressure was partly offset by moderate increase in employee costs and other expenses. Further, ad-spends grew only 7% despite a low base. Ebitda margin contraction was arrested to c.50bps y-o-y (+70bps q-o-q), at 24.6%. Resultant 9% Ebitda growth was slightly above estimates.
Digital ramp-up: 15% of revenues are now captured online (eB2B + D2C + ecommerce) vs. 10% in last quarter.
Slight EPS cut: We cut our FY22-24 EPS estimates marginally and retain a Buy rating with a PT of Rs 2,900 (vs. Rs 2,850 earlier) as we roll over from Jun to Sep-23.