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HUL: Volume growth beat estimates

Healthy growth across all segments; royalty increase not a concern

HUL: Volume growth beat estimates
In the rural segment, rural demand was better in the Dec’22 quarter compared to the Sep’22 quarter. (Photographer: Kuni Takahashi/Bloomberg

Fast-moving consumer goods company Hindustan Unilever (HUL) standalone net profit increased by 12% to Rs 2,505 crore. The company had reported a profit of Rs 2,243 crore in the year-ago period. The company’s standalone revenue from operations came in at Rs 15,228 crore, up 16% against Rs 13,092 crore logged in the corresponding quarter of the previous fiscal. The numbers beat estimates, standalone revenue was expected to come in at Rs 14,904 crore, up 13.8% y-o-y while profit after tax (PAT) was estimated to increase 8.3% y-o-y to Rs 2,481 crore. While rural recovery and commodity cost declines are taking longer than expected, management believes that the worst is over and HUVR will be a clear beneficiary on both fronts. Maintain Buy.

While home care revenue was up 31.6% y-o-y, personal care revenue rose 10.5% y-o-y. The food & refreshment business sales grew 6.8% y-o-y.

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In the rural segment, rural demand was better in the Dec’22 quarter compared to the Sep’22 quarter. The rural slowdown seems to be bottoming out, but growth needs to be observed. High rural inflation persists. MNREGA benefits need to be closely monitored, as do eventual Rabi harvest realisation and monsoons in the next 6-7 months.

Management expects commodity costs to come down gradually. Other income saw a sharp increase because of higher treasury yields and dividends from subsidiaries. The current trademark license is valid for 10 years ending on 31st Jan’23 with 2.65% royalty in FY22.

Royalty was supposed to rise to 3.15% by Jan’23 as per the last decadal agreement, but acquisitions by HUVR in the last few years, especially GSKCH brands for which HUVR owns brand rights, meant that royalty was at 2.65% at the end of the tenure.

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Royalty will go up by 45bp in the Feb-Dec’23 period, 25bp in CY24 and 10bp in CY25 eventually to 3.45% of turnover, a level that will be maintained up to the end of CY27. These royalty changes are included in management’s double-digit EPS growth targets for the medium to long term announced during the investor day in Nov’22.

HUVR continues to exhibit remarkable dexterity, despite its size, led by its WIMI (winning in many Indias’ model, and cluster-based approach, its technological edge over peers; and funneling massive cost savings back into the business for growth. On rural recovery and commodity cost reductions, we believe that HUVR will get back to the mid-to-high teens earnings growth trajectory that it exhibited for the four years before Covid.

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First published on: 23-01-2023 at 02:50:00 am