01-01-1970 12:00 AM | Source: Motilal Oswal Financial Services Ltd
Buy Hindustan Unilever Ltd For Target Rs.2,840 - Motilal Oswal
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Topline better than expected; commentary suggests improving momentum

* HUVR’s 1QFY22 result was better than our expectations led by topline growth.

* Sales in the month of Jun’21 were reportedly back to levels seen before the second COVID wave witnessed in Mar’21, and augurs well for Discretionary sales and margin going forward.

* Despite the higher incidence of COVID-19 cases in rural India compared to last year, the demand momentum remains resilient. The expectation of a good monsoon should sustain this momentum. Urban demand is expected to see a strong rebound. With Discretionary demand back on the recovery path, mix improvements will play a major role in driving a gradual margin improvement sequentially.

* While elevated material cost remains a near-term worry, a) a potential revival in EPS growth momentum after a relative lull in recent quarters, b) continued synergies from GSKCH (tracking ahead of expectations so far), c) HUVR pulling further ahead of peers in terms of technology and analytics as indicated in our annual report analysis and strong track record in recent years lead us to maintain our BUY rating on the stock.

 

Performance largely in line

* Reported net sales grew 12.8% YoY to INR119.2b in 1QFY22 (est. INR114.6b). EBITDA/PBT/PAT (bei) increased by 7.7%/5.1%/4.8% YoY to INR28.5b/INR26.6b/INR19.6b (est. INR27.2b/INR25.9b/INR19.2b).

* Sales in the domestic consumer business grew 12% YoY, with underlying volume growth of 9% (est. 5%).

* Segmental performance: Home Care (32% of total sales in 1QFY22) revenue grew 11.9% YoY. Personal Care sales (38% of total sales) rose 13.2% YoY. Foods and Refreshments sales (28% of total sales) grew 12.2% YoY.

* Segmental EBIT margin: Home Care margin contracted by 130bp YoY to 17.4%. Personal Care margin remained flat at 28.1%. Margin in the Foods and Refreshments segment contracted by 160bp YoY to 18.1%.

* Overall gross margin in 1QFY22 contracted by 140bp YoY to 50.4%.

* As a percentage of sales, lower operating expenses (-80bp YoY to 12.8%), higher ad spends (+110bp YoY to 8.6%), and lower staff cost (-40bp YoY to 5.2%), led to an EBITDA margin contraction of 110bp YoY to 23.9%.

 

Highlights from the management commentary

* Rural demand has remained resilient, despite a higher incidence of COVID19 cases v/s last year. The expectation of a good monsoon also augurs well for demand going forward, with no material downtrading being witnessed.

* With mobility improving, demand for FMCG products will improve, especially for those which are discretionary in nature, leading to higher operating margin going forward.

* Health, Hygiene, and Nutrition (85% of sales in 1QFY22) grew 8% YoY despite a high base and rose 16% v/s 1QFY20 levels. The Discretionary portfolio (12% of sales) grew 39% YoY, but was still 24% lower than 1QFY20 levels. Out-of-Home (3% of sales) grew 91% YoY but was still 40% lower v/s 1QFY20 levels. While lower mobility in 1QFY22 impacted normalization of Discretionary and OOH demand, the outlook is getting better as indicated in its Jun’21 performance.

* Shikhar app – HUVR recently on-boarded 50,000 retailers, with a total reach of 550,000 now. Sales through the app in Jun’21 were 6x that of Jun’20 levels. The future-ready sales platform (including e-commerce) is now 10% of total sales.

 

Valuation and view

* There is no material change to our forecast.

* HUVR continues to strengthen the key drivers of its success in India over the last decade, including: a) pioneering the use of technology to generate data and facilitate decision making, b) the Winning in Many Indias (WiMI) strategy, which is focused on decentralization and localized strategies, c) recognizing trends and investing in them early on, d) funneling cost savings back into the business, and e) its strong execution ability, which has led to a strong momentum in the past few years.

* Earnings growth has gained further impetus in recent years (before COVID-19 affected FY21) – it reported ~18% EPS CAGR in the four years ended FY20 v/s ~12% CAGR over FY10-20. This is particularly impressive given the weak mid-single-digit earnings growth posted by (much smaller) peers in recent years.

* After premiumization in Detergents led to strong growth in detergent sales and margin in the last decade, the Personal Wash and Dishwashing segments show considerable promise going forward. The high margin Discretionary portfolio was under pressure in FY21, resulting in lower than the usual 12% adjusted EPS growth.

* While the Jun’21 quarter was affected on this front due to lockdowns, the management commentary suggests substantial improvement in mix in subsequent quarters. Synergies from the GSKCH business (tracking ahead of earlier expectations) would play a bigger role in resumption of strong earnings growth going forward.

* We maintain our BUY rating, with a TP of INR2,840 (55x Sep’23E EPS).

 

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