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HUVR’s Q1FY24 print was below our estimates; Revenue/EBITDA/APAT grew 6.1%/8.4%/ 9.0%, held by 3.0% volume growth. Management opined, it was a stable performance given growth in rural markets now turned positive (-4% in base Qtr). Despite price cuts in soaps, destocking by trade channel resulted in 2-3 days’ inventory correction. Further, sliding prices of top-4 commodities extended gross margin to 49.9% (+251bp). Although ad-spends risen to 9.9% (% of sales), higher employee cost/other expenses at 9.0%/20.2% resulted in 8.4% growth in EBITDA, settling EBITDA margin at 23.2% (+49bp) YoY. With benign inflation, the regional competition now resurfaced in mass categories and to maintain price-value equation HUVR initiated price cuts in detergent, soaps and BPC portfolio. Despite step-up in A & P spends, and price cuts management aims to building back gross margin. We remain cautiously optimistic expecting mid-single digit volume growth as near term operating environment continue to be challenging. We tweaked our earnings and retain ADD rating, with a revised DCF-based TP of Rs2,800 (implying 54.8x FY25E EPS).

Q1FY24 revenues led by Home care (+10.0%); BPC under strain (+4.4%); Weak HFD growth Given strong pricing action in the base, domestic business grew 6.1%, driven by 3.0% volume growth. Segmental growth value/volume - Home care: +10.0%/~4.0%, BPC: +4.4%/~3.0%, and F&R: +4.7%/flat. Management opined, it was a stable performance and 75% business wining market shares as growth in rural markets now turned positive (-4% in base Qtr). HUVR said, with benign inflation the regional competition now resurfaced in mass categories citing, downgrading in tea, soaps and detergent, while rising milk inflation pressured HFD demand. We note, despite price cuts in soaps, destocking by the trade resulted in 2-3 days’ inventory correction and it may continue in Q2. Management remains optimistic on recovery in rural markets given: (1) bottoming out of food inflation, (2) govt. spending to lift rural income, and (3) govt. spending on rural infrastructure to drive consumption thereby stimulating volume growth.

Operating environment remain tough; persistent price cuts, and ad-spends to hold margins

In Q1, sliding prices of top-4 commodities - CPO, caustic soda, crude oil, and soda ash, extended gross margin to 49.9% (+251bp). Although ad-spends risen to 9.9% (% of sales), higher employee cost/other expenses at 9.0%/20.2% resulted in 8.4% growth in EBITDA, settling EBITDA margin at 23.2% (+49bp) YoY. To maintain price-value equation, HUVR initiated price cuts in detergent, soaps and BPC portfolio yet expect A& P spends to inch up. HUVR expects improvement in gross margins led by, (a) strong cost saving program Symphony, (b) premium mix-change, (c) easing of key RM/PM, and (d) agile supply chain ability.

Outlook remains cautiously optimistic;

expect gradual recovery in consumer demand We have argued in the past that in a rising inflationary scenario HUVR could grab market from local/ regional players across portfolio, but with easing of commodity inflation there is a risk of such competition to hit back. To remain relevant and retain consumer confidence HUVR may need to provide superior value and invest more in consumer promotions and ad-spends.

Valuation and risks

We expect gradual recovery in discretionary spends and inherent distribution strength to drive BPC/GSK-CH business. That said price cuts to check margins in our view, yet we expect mid-single digit volume growth in FY24E. We need to be watchful about, (1) dent from regional competition, (2) to prioritize volume HUVR may step up A & P spends, and (3) margins to remain in a tight band. We increased our earnings in FY24E/FY25E by 1.1%/2.5% and retain ADD rating, with a revised DCF-based TP of Rs2,800 (implying 54.8x FY25E EPS). Risks to our call include significant acceleration in volume/price, decrease in ad-spends & lower competitive intensity.

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