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Volume-led growth focus over margins continues

Continued strong double-digit growth (+22% YoY) in health, hygiene and nutrition portfolio with high-teens volume growth in nutrition business was encouraging to note in 4QFY21. Underlying volume grew 16% (2-year CAGR of 4%). We note that HUL’s continued focus on volume growth even at the expense of gross margins in the near-term (see report) is likely to accelerate volume growth.

We like (1) HUL’s supply chain agility (1.3x capacity vs pre-covid) and digital initiatives (incremental Shikhar outlets) in these challenging times, (2) efforts towards reducing priceaffordability mismatch in nutrition business along with seamless integration of GSK’s business, and (3) continuing plans to gain market shares in various categories by partially absorbing input cost inflation in short-term. However, we reckon that the probability of new pouch pack in nutrition cannibalising the refill pack (as its 20% cheaper) is high. This leads to (likely) re-investment of synergy benefits from GSK – HUL merger which is not a base case for consensus, in our view (see report). Maintain ADD

* Overall revenue performance improved:

Reported revenue / EBITDA / recurring PAT grew 35% / 43% / 43%. Underlying domestic consumer business revenue (excluding merger of GSK CH and VWash) grew 21% with 16% volume growth (UVG; 2-year CAGR of 4%). Health, Hygiene and Nutrition (80% of company portfolio) witnessed 22% revenue growth. Further, discretionary segments of Skin care, Deos and Colour cosmetics (15% revenue contribution) and out of home consumption businesses like water, ice-creams, food solutions and vending (5% revenue contribution) also grew 10% and 61% respectively as consumer sentiment improved, however, on a much lower base. Nutrition volumes grew in double digits in Q4 and like-to-like EBITDA margins expanded 370bps in FY21.

* Gross margin impacted due to commodity headwinds:

Gross margin declined 120bps to 52.6% due to an inflationary trend in input costs which was partially offset by price hikes. HUL continued with the strategy to not pass on the steep inflation completely through calibrated price hikes in order to gain market shares (82% of the portfolio gained volume market shares in Q4). It continues to believe that if it can retain and recruit new consumers, margin expansion can be achieved over time.

* Cost savings, lower ad-spends drive operating margin expansion:

Reported EBITDA margin expanded 150bps YoY to 24.4% due to better absorption of adspends (-130bps YoY) and lower other operating expenses (-170bps YoY).

* Other highlights:

1) OCF grew by 23% to ~Rs90bn while FCF declined by 25% to Rs49bn largely due to acquisition of Horlicks brand from parent, 2) working capital days increased by 6 days to (29) days, 3) 87% of portfolio gained penetration, 4) total coverage of Shikhar outlets is now 0.5mn, 5) E-commerce growth and contribution doubled YoY, and 6) 150+ SKUs launched in FY21.

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