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Resilient operating performance in 4Q but near‐term outlook challenging; maintain ADD

Our view

HUL delivered a resilient performance on both growth and margin fronts in 4Q despite the headwinds to rural/urban demand and persistent material cost inflation. Volume growth has been soft for two quarters now, but well ahead of industry growth which saw a high single‐ digit decline. Company’s ability to control expenses and increase prices while maintaining share has been commendable as it was able to deliver stable operating margin despite 310bps gross margin contraction. Strong performance from Home care and Foods portfolio was another positive in Q4 while skin care and nutrition was soft due to the discretionary nature. Resilient growth despite significant price hikes indicates the strong brand saliency and product superiority. We expect growth in the near‐term to remain pricing and mix‐led as volume growth should remain lackluster till inflation cools off and disposable incomes start increasing which is not expected for the next 2‐3 quarters. The nutrition business continues to show signs of picking up post the GTM integration and market development efforts from the company. We still expect the growth to sustain in double‐digits going forward as the company benefits from its WIMI strategy and wide portfolio albeit margin trajectory should come off in before building up again from late FY23 onwards. We maintain an ADD rating as we believe the valuations have become favorable post recent correction and the company is well placed to tackle this transient inflation‐led soft volume growth period with offsets like cost/productivity levers coupled with and continued innovation and premiumization

Result Highlights

* Revenue – Standalone revenue grew 11% to Rs134.6bn with flat domestic volumes, home care growth at 23.7%, BPC growth at 3.6% and foods growth at 5.3%. Revenue/volume growth of 11%/3% in FY22.

* Gross margins – Gross margins plunged 310bps/260bps YoY/QoQ to 49.5% registering new lows led by continued inflation in input costs. Pricing/mix growth stood at 8% in FY22.EBITDA margin slightly ahead of expectation at 24.1%, lower by 90bps/30bps QoQ/YoY helped by timely price hikes, lower A&P spend and other expenses during the quarter.

* PAT and Dividend– PAT growth of 6.6%YoY with PAT coming in at Rs22.7bn with dividend declared at Rs 19/share in Q4 and total dividend at Rs 34/share in FY22.

Valuation

We trim our EPS estimates by 4‐7% and now build in a revenue/EBITDA/PAT CAGR of 10.6%/12.1% over FY22‐24E. We lower our target multiple to 50x (in‐line with 5‐yr average) on FY24E earnings to factor in the ongoing low earnings growth period and higher cost of capital. But we still maintain an ADD rating given recent underperformance with a revised PT of Rs 2,380. Despite near‐term growth concerns, we remain structurally positive on the company and recommend to keep adding the stock on any declines with a re‐rating expected as soon as inflation starts cooling off.

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