Hindustan Unilever (HUVR) reported Q1FY24 performance slightly below expectations, with volume growth reaching 3% y-o-y, falling short of the anticipated 7% growth. The lower growth was attributed to increased inflation negatively impacting consumer spending. Notably, the rural market demonstrated volume growth during the quarter, and this momentum is expected to continue. However, monitoring weather patterns remains crucial as they can influence future performance. To revitalise volume and reach pre-COVID levels, the company is normalising its advertising & promotion (A&P) spends, which represent 9.8% of sales.
Management plans to channel the gross margin expansion towards ad spends to drive volume growth. Nonetheless, there was a 120bp y-o-y increase in ‘other expenses’ due to heightened investments, the impact of new royalty incentives, and favourable benefits in the base quarter.
Q1FY24 performance fell slightly short of our expectations. During the quarter, volumes grew 3% y-o-y vs. expectation of 7% growth, as higher inflation is adversely impacting consumer spending.
The outlook for HUVR remains balanced with lower commodity costs and gradual recovery in rural demand offset by reduced leverage on pricing and increased competition from smaller players in some categories. We reiterate our Buy rating with a target price (TP) of Rs 3,100.
Performance slightly lower than estimated
Reported net sales grew 6.1% y-o-y to Rs 151.5 billion. Ebitda grew 8.4% y-o-y to Rs 35.2 billion; PBT grew 9.8% y-o-y to Rs 34 billion; PAT was up 9.2% y-o-y to Rs 25 billion. Underlying volumes grew 3% y-o-y during the quarter.
Segmental performance: Home Care revenues were up 10% y-o-y, Personal Care revenues
rose 4.4% y-o-y, and Food & Refreshment business sales were up 4.7% y-o-y.
Segmental Ebit: Home Care margin improved 60bp y-o-y to 18.3% and Personal Care margin remained flat at 26.3% while Food & Refreshment margin expanded 200bp y-o-y to 17.9% in Q1FY24. Overall gross margins for the quarter expanded 260bp y-o-y and 120bp q-o-q to 49.9%. As a percentage of sales, increase in ad spends, and other expenses as well as staff costs at 4.3% resulted in Ebitda margin stood at 23.2%.
Valuation and view
We have revised our EPS estimates downward by 3-4% for FY24/FY25, considering the management’s commentary on demand, pricing, higher brand investment, and higher tax rates. As mentioned in our annual report note from Jun’23, Hindustan Unilever continues to demonstrate remarkable agility, despite its size, driven by (i) its ‘Winning in Many Indias’ (WIMI) and cluster-based approach, (ii) technological superiority over its peers, and (iii) reinvesting cost savings back into the business for growth. Despite its expanded scale, Hindustan Unilever maintains its flexibility, outperforming its peers and sustaining a trajectory of steady growth. Encouraging signs of rural recovery and reductions in commodity costs lead us to be optimistic that HUVR will return to the mid-to-high teens earnings growth trajectory it exhibited for four years before the pandemic.