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Hasta la vista, Sanjiv. Adios with a flourish!

Sanjiv Mehta as MD & CEO of HUL over 2013-2023 delivered impressive CAGR of 20% in TSR and 13% in EBITDA. HUL stock's P/E rerated to ~50x from ~25-30x (highest rerating in sector).

Key achievements include (1) implementation of ‘winning in many Indias’ (WIMI) strategy, (2) hyper focus on category creation, (3) premiumisation (10ppt improvement to 33% of revenues), (4) creating bigger brands (19 brands with >Rs10bn revenues in 2023 vs 10 in 2013), (5) market share gains in most parts of the portfolio, (6) technology (Jarvis, Shikhar) to drive efficiencies in existing ecosystem and (7) 44% gender diversity and HUL continues to be an employer of choice.

Notable misses are (1) material delay in EVA creation from GSK acquisition, (2) losing significant (future) profit pools in premium BPC to startups, (3) creating newer brand opportunities to serve the BOP consumer, in our opinion.

* 20% CAGR wealth creation in 2013-2023 driven by fundamental business outperformance: In India, HUL, during the past 10 years (FY13-FY23), added Rs329bn to revenue - a growth of 2.3x (9% CAGR). During the same period, EBITDA margin expanded by 760bps (to 23%) and EBITDA by 3.4x (13% CAGR). Market capitalisation increased 5x (18% CAGR vs 16% CAGR in Nestle India) to over Rs6,340bn, which is more than the market cap of many global FMCG companies including Kraft Heinz, Reckitt Benckiser, General Mills, Colgate, etc.

* ~2x P/E rerating – highest in the FMCG sector: HUL’s 1-year forward P/E multiple has rerated from ~25-30x during FY13-FY14 to ~50x in FY23-FY24-TD. This explains ~5% CAGR of the total 20% CAGR in TSR during FY13-23. Also, this is the highest PE re-rating (~1.9x for HUL) compared to peers in FMCG sector which have witnessed re-rating in the range of 1-1.7x.

* Market development and premiumisation played pivotal role: HUL has executed well on the science and art of market development in all the key segments (home care, BPC and F&R). During FY23, these new segments constituted over 20% of overall revenue. Further, revenue share of premium products increased from 22% in FY12 to 33% in FY23.

* 2x growth in no. of brands with >Rs10bn revenue: During FY13-FY23, HUL has doubled its total number of brands with >Rs10bn revenue from 10 in FY13 to 19 in FY23.

* Most brands more than doubled in terms of revenue: Brooke Bond and Surf Excel outperformed significantly: Revenue from most brands (9/10 – except Clinic Plus) more than doubled during FY13-FY23. Notable performance was in Brooke Bond and Surf Excel wherein revenue has grown materially (from >Rs10bn in FY13 to > Rs50bn in FY23).

* High focus on technology driven nimbleness and efficiency: The Jarvis model developed by HUL allows the company to optimise different variables (demand/supply driven) using Bayesian modelling to drive efficiency. From a linear value chain, HUL is becoming a web of technology-driven ecosystem. This is likely driving faster and more effective decision-making, and hence aiding in improving cost efficiencies.

* Valuation and risks: We maintain our earnings estimates for FY24-25E, modelling revenue / EBITDA / PAT CAGRs of 11% / 15% / 15 (%) over FY23- FY25E. Maintain ADD with a DCF-based target price of Rs2,800 (vs Rs 2750 earlier). Key downside risks: delayed recovery in demand, sustained raw material inflation, and irrational competition.

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