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A mixed bag, focus on strengthening the core

HUL posted a mixed result, with revenue/EBITDA growth of 20/17% (HSIE 18/19%). Ex-GSK, revenue grew by 7% YoY with UVG of 4% YoY (in-line). The company saw a recovery in demand for discretionary as well as OOH categories and revenue pressure eased out. Health, Hygiene and Nutrition (80% mix) continued to deliver strong double-digit growth, supported by new launches and price hikes. Market share gains in e-comm (market share above pre-COVID level) and strong rural growth (2x YoY) drove revenue growth. Nutrition portfolio (GSK) posted double-digit growth, and supply issues are over. High commodity inflation impacted GM, despite an improved product mix. A&P expenses returned to growth as the company resumed investments. We expect a sustained recovery in the discretionary portfolio along with growth acceleration in nutrition portfolio. We maintain our EPS estimates for FY21/FY22/FY23. We value HUL at 52x P/E on Mar-23E EPS to derive a TP of Rs 2,315. Maintain REDUCE, as there is limited scope for re-rating.

* Discretionary continues recovery: Overall revenue grew 20% YoY (HSIE 18%) while ex-GSK revenue was up 7% YoY (+4% in 3QFY20 and +4% in 2QFY21). BPC/F&R (incl GSK) grew by 10/80% YoY (F&R 19% ex-GSK) while Home Care dipped by 1% YoY. Health, Hygiene and Nutrition portfolio (80% mix) clocked a sustained growth at 10% YoY, while discretionary (-1% YoY) and OOH (-15% YoY) continued to recover. The company has seen sequential improvement and expects growth to sustain.

Rural growth is outperforming, and it is expected to sustain in the near term.

* Slight miss in margins: Gross margin contracted by 24bps YoY (+44bps in 3QFY20 and -145bps in 2QFY21) vs an expectation of 52bps YoY contraction. Unprecedented commodity inflation (especially in crude, palm oil and tea) impacted the margin, despite an improving product mix. Home care/BPC EBIT margin expanded by 75/81bps YoY while F&R margin contracted by 381bps YoY. Employee/A&P/Other expenses grew by 23/19/28% YoY. Ad spends by the company were competitive, and it retained the highest share of voice. EBITDA margin contracted by 87bps YoY to 24.1% (+352bps in 3QFY20 and +28bps in 2QFY21). EBITDA grew 17% YoY (HSIE 19%). PBT clocked 13% YoY growth while PAT grew by 19% YoY.

* Call takeaways: (1) 86% of the portfolio gained penetration during the quarter; (2) Horlicks and Boost saw double-digit growth, led by large packs (>500gm); (3) e-comm growth rate as well as revenue mix doubled YoY; (4) skin cleansing, skincare and tea saw improved growth within the premium segment; and (5) the company remains focused on driving innovation across categories.

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