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Longer term growth engines robust

Hindustan Unilever (HUVR)’s Annual Investor Meet once again underlined the immense  moats the company has and the remarkable nimbleness it has exhibited and continues to  exhibit despite being much larger than peers. 

* The management shared details on the augmentation of its analytics and R&D  strengths, which were already far superior v/s peers. 

* As highlighted in our Annual Report note, there have been a host of initiatives  in the past year focusing on the burgeoning E-Commerce market, which now  contributes 8–9% to HUVR’s sales. The company’s portfolio is already well- placed, with its E-Commerce market share higher than its Modern Trade (MT)  market share, which, in turn, is higher than its General Trade (GT) market  share.  

* Winning in Many Indias (WiMI) has been a key factor driving volume growth  and market share gains for the company in recent years. However, the  localization of products as well as communication is only gathering further  steam – of which the company stated several examples in the analyst meet in  categories ranging from Foods to Beauty and Personal Care (BPC) – and ought  to be a key driver of growth for many years to come. 

* In the past decade, the company has seen a 9% sales CAGR and EBITDA  margins have expanded ~1,000bp (despite the consistent guidance for modest  improvement in operating margins). This was in spite of significant disruptions  in the form of weak rural growth in the second half of the decade,  demonetization, GST, and COVID. The management is aiming for a double-digit  EPS CAGR over the next 10 years, led by top line. With the long runway for  growth in FMCG in India, increasing premiumization, and synergies from  GSKCH, we believe earnings could continue to compound at 14–15% over the  next 10 years, similar to growth in the preceding 10 years. 

* The demand outlook is healthy as good rural growth in recent quarters would  be sustained by good kharif (monsoon crop) sowing (which has been at healthy  levels) and recovery in the urban markets post the lockdown impact in 1QFY22.  Commodity costs, while still elevated, have remained stable on a sequential  basis, improving the margin outlook, especially with further price increases  taken in Skin Cleansing, Detergents, and Tea in 2QFY22. 

* We maintain our Buy rating on the stock.

Details from the Analyst Meet 

* Gaining market share: HUVR now has 14 brands with over INR10b in annual  sales (v/s 12 brands last year). In FY21, it gained market share in 84% of its  portfolio and launched more than 150 SKUs. 

* Well-placed; long runway for growth: HUVR is by far the largest FMCG  company in India as a result of the widest distribution reach and a humungous  portfolio of large brands (two brands have over INR50b in sales, four brands  over INR20b, 8 brands over INR10b, and 9 brands over INR5b). It is the market  leader in 80% of its portfolio. Its people strength is also extremely robust, with  the company being the No 1 employer across industries for over 10 years.  Despite massive disruptions in the past decade, sales have compounded at  nearly double digits over the past decade, even higher v/s smaller peers.  Nevertheless, the scope for growth in India is high, especially for a company  with HUVR’s moats, with the per capita FMCG consumption in the country a  fraction of even other Asian market peers (Indonesia 2x, China 3x, Philippines  6x, and Thailand 10x). While rural India has been a big driver of growth in recent  years, the runway for growth in this region is even larger, with the per capita  consumption a third of the levels of urban India.

* Well-positioned in channels of the future: As highlighted in our Annual Report  note, a host of initiatives in the past year have focused on the burgeoning E- Commerce market, which now contributes 8–9% to HUVR’s sales. The  company’s portfolio is already well-placed, with the E-Commerce market share  higher than the MT market share, which, in turn, is higher than the GT market  share. In the company’s largest segment – Beauty and Personal Care (BPC) – 6 of  the top 10 brands sold on e-commerce are HUVR brands. India is the second  fastest digitizing market in the world, with data costs among the lowest  worldwide. India also has the highest number of digital payments, with the  country overtaking China last year.  

* Local strategy/communication gaining further steam: The company’s WIMI  strategy – which facilitated decentralized decision-making – has been an  important driver of the top line and has also driven earnings growth higher v/s  peers. The company in the Analyst Meet highlighted several instances of  increasing pervasiveness. Lux is a large brand where the company has had a  differentiated product mix across regions recently. Food is another category  where a differentiated portfolio and differentiated advertising have been  increasingly adopted in recent years in categories such as Tea, Coffee, and the  Nutrition (GSK) portfolio. 

* Path to premiumization immense in large categories: The Detergents market  has seen strong premiumization over the past decade. Despite this, the  potential for further premiumization is high, with 65m washing machines  expected to be added over the next few years v/s the current washing machine  base of 35m. With HUVR’s higher market share in Premium Detergents (3x  higher v/s the base), the company is particularly well-placed. The Liquid  Detergents category (used in washing machines) has 2x higher realization v/s  base products and is significantly gross margin-accretive. Beauty and Personal  Care offers tremendous scope for premiumization, especially led by (a) the  online channel (25–30m online shoppers in the category), (b) naturals-based  beauty focus, and (c) personalization. The Hair Conditioner market, wherein the  company has 70% market share, is seeing strong growth as a result of HUVR’s  category development efforts. The company has rolled out high-margin e- commerce focused BPC products such as sheet marks, skin serums, hair masks,  and hair serums. As part of the Digital First approach for digitally native  customers, a new Premium Beauty business unit has also been set up.  

* Scaling up on R&D and analytics; increasing flexibility: The parent, Unilever,  has over 5,000 scientists globally, of which 650 are in India (spread across three  R&D centers), the largest R&D set up among the FMCG companies in India.  Parent company, Unilever, has over 20,000 patents which the Indian subsidiary  can benefit from. In addition, the India-based R&D team is working extensively in the areas of digital, artificial intelligence, product design, packaging  improvement, automation capabilities, and sustainability. The aim is to achieve  higher growth v/s peers by transforming not just the products but also the  categories. HUVR has digitized the entire value chain, from supplier to customer,  and data is now considered the company’s third largest asset apart from brands  and people. The analytics team is (a) improving data captures, (b) reducing the  time to launch, (c) facilitating launches in the right channel and markets, (d)  improving logistics efficiency and reducing costs, and (e) helping the company  find the right assortment of retail stores. With the traditional mom-and-pop  shops still likely to be the dominant channel for FMCG companies going forward  as well, these initiatives (coupled with the tie-up with the State Bank of India to  finance channel partners) would go a long way in improving efficiency and  sustaining strong channel relationships for HUVR.

Valuation and view 

* The company continues to place the building blocks for future growth and has  been able to do so ahead of peers. It continues to display the dexterity shown  over the last decade despite its larger size, even as it continues to grow faster  v/s peers.  

* 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,  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 positive earnings momentum. 

* HUVR has historically had the upper hand when it comes to brand, distribution,  and quality of personnel over peers, which they keep strengthening. With its  dexterity in decision making, exemplified by WIMI and CCBT, as well as the cost  savings (now 8% of sales) being plowed back into the business, the company has  revitalized topline and earnings growth in the last decade – despite being much  larger v/s peers. Finally, with its analytics and R&D initiatives in recent years  (which are ahead of peers and gathering further momentum), HUVR is ensuring  that it does not get disrupted in a dynamic environment and would, in fact, be  the disrupter in most cases. No other consumer company in India has all of  these advantages.       

* The company’s earnings growth has gained further impetus in recent years  (before COVID-19 affected FY21) – it reported a ~18% EPS CAGR in the four  years ended FY20. 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  margins 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) – and is expected to face significant pressure in FY22 as well (albeit less  than in the previous year). Nevertheless, the trajectory of premiumization over  the medium term is evident. Additionally, synergies from the GSKCH business  would play a big role in the resumption of strong earnings growth going forward.  

* There is no material change in our forecasts. We maintain a Buy rating, with TP  of INR3,280 (60x Dec’23E EPS).

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