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Higher inflation risks impacting short term demand

Notwithstanding to HUVRs robust business model, coupled with agile management with strong execution capability driving growth strategy, we believe, sharp inflation, and adverse macro environment result in sluggish demand for its key categories. However, inflation is upsetting staples consumption, we expect flat revenue growth in Q4 with mid-single digit decline in volumes, largely driven by rural markets. Though Covid third wave had limited impact, our interaction with channel partners indicate there is a visible down-trading towards LUPs, yet laundry and dish-wash segment could report better growth in Q4. Despite sequential inflation of 10-15% in key RM, and the mix deterioration witnessed in BPC, coupled with media inflation would weigh high on margins. We maintain our ADD rating with revised TP Rs2,273.

Sluggish rural demand to impact Q4 volumes; discretionary demand is weaker

Our interactions with channel partners indicate, though Covid third wave had limited impact in Jan/Feb, demand for laundry and dish-wash segment was good, yet weak consumer sentiments impacted other categories especially with higher consumer mobility should have raised demand for margin accretive categories such as BPC - hair and skin care but the case was not so. We note higher inflation impacting the consumer wallet as they tighten spends, choosing down-trading for smaller packs(LUPs). This trend was more visible across channels (touch points) but more pronounced in rural markets. Further weak consumer sentiments across markets could result in slower growth for premium products in our view. Even nutrition business (GSK-CH) was slow-moving due to weak demand. Given this on the back of sharp price increases we expect mid-single digit decline in Q4 volumes.

Margins under pressure; inflation risk is higher

In past HUVR has well managed the price vs volume equation, but this time inflation risk is higher. Further in Q3FY22 earnings call the management indicated rising RM pressure to put strain on margins. Even though the company executed few price increases in skin, personal care and coffee, sequential inflation in key commodities, such as LAB, Soda Ash, and packaging material ranging from 10-15% could impact margins. Nonetheless, a greater impact of Ukraine crises which pushed costs for derivatives of crude palm oil and crude oil could be seen in Q1FY23. Considering RM/PM pressure and media inflation coupled with inferior product-mix to weigh high on margins in our view.

Valuation and risks

We reckon, HUVR is credited with inherent distribution strength, agile management, and strong execution capability. Though we expect gradual recovery in discretionary spends, HUVR’s earnings have underperformed that if peer set. Further, its key categories such as detergents, dish-wash and soaps are stressed under unabated inflation risks and eminent rise in input costs directed us to cut FY22E/FY23E earnings by 8.0%/8.6%. We retain ADD rating with a revised DCF-based TP of Rs2,273 (52.9x FY23E/FY24e avg. EPS). Risks to our call include significant acceleration in volume/ price, decrease in ad-spends, and lower competitive intensity.

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