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We reckon HUL’s stock could be under some bit of a pressure on the back of its Mar-Q performance and management’s commentaries thereto. Growth was weaker than we anticipated and as was margin, and management’s remark that there could be a lag between price-growth winding down and volume-growth picking up makes the near-term outlook a little more uncertain. Given its on-ground execution capabilities, we believe the business could successfully navigate this phase as well with little or no damage but macro doesn’t look all that supportive just yet, even though HUL continues to stick to its earlier prognosis that rural slowdown is likely bottoming out. The template for FY24E, in our view, would be an entirely volume-driven single-digit sales growth with strong gross margin expansion but more than half of it getting offset by the need to up A&P that has been run down by >350bps over the last three years. We are lowering our target price to make it in sync with the stock’s current trading multiple (52-53x NTM EPS) as a re-rating may not come by so easily in what appears to be a tougher operating environment.

* Both volumes and margin were short of expectations: HUL reported 11%, 7% and 8.2% growth in sales, EBITDA and adjusted net profit to INR146.4bn, INR34.7bn and INR24.7bn. Volumes grew 4% vs our forecast of 6% while pricing element expectedly tapered off to 6.7% vs 10%+ levels seen over the past four quarters. Lower-thanexpected growth in volumes plus higher Staff Cost and Other Expenses (some phasing issues, as per management) resulted in 5-6% shortfall vs our profit expectations.

* Home-care still strong but off the remarkable levels seen in recent times: Segmentally: 1) Home-care, which has been the key revenue and profit driver over the past many quarters continued to grow well (+18.7%) and benefit from portfolio premiumisation. 2) BPC growth of 10.1% is in-line with recent quarters but not good enough given the inherent opportunities of the Personal Products portfolio housed therein. On the positive side, the segment was able to maintain its double-digit growth rate despite a much lower pricing component in the Soaps business. 3) F&R remained weak and grew just 2.6%. Nutrition, Ice-creams and Packaged Foods grew in mid-single-digit but Tea likely faced growth challenges due to consumers downgrading in the category. Nutrition continues to trail initiation expectations, though, in part due to inflation impacting category consumption.

* Gross margin build-back appears on track but higher overheads impacted flowthrough this time round: Gross margin compressed 69bps yoy, which was much lower vs recent quarters’ decline of c.500-600bps. Reversal in costs-inflation trend in some of the key inputs - notably palm oil, caustic soda, crude – helped further reduce the gap between pricing and materials-inflation to just c.2% now vs double-digit in recent quarters, which drove sequential improvement in gross margin trend. Ad-spends rose 7.5% qoq but still flattish vs year-ago level – this is likely to inch up further and offset quite a bit of the gross margin cushion that one expects in the coming year. Staff costs, however, rose 26% yoy and Other Expenses (net of estimated royalty hike) also grew 10-11% which are uncharacteristically high vs what HUL has been reporting; management cites true-up of employee benefits expense and some phasing of costs to be the reasons thereof. Operating margin, as a result, fell 89bps yoy to 23.7% vs a slight expansion that we expected for the quarter.

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