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Strong market share gains, yet improved margins

HUVR’s Q3FY22 results are in-line with our estimates – revenue/EBITDA/APAT grew 10.4%/14.9/17.3% YoY. The domestic business saw 11% growth, backed by 2% volume growth. On a 2-year CAGR, Health, hygiene and nutrition (85%) grew 10%, while discretionary (12%) grew 5%. The OOH business (3%) grew 12% on improved consumer mobility. Gross margin contracted 186bp to 52.1% due to elevated inflation in top-3 commodities – palm oil (PFAD), crude oil (LAB), and HDPE (packaging). Despite higher price increases, with rise in employee cost (+17.1%), and other expenditure (+5.8%) company cut its ad-spend (-14.3%) reporting EBITDA growth at 14.9%, while EBITDA margin expanded 99bp to 22%. The management said near term operating environment continue to be challenging, especially highlighting weak rural demand ahead, yet raised concerns on margins. We have cut earnings by 8% and retain ADD rating, with a revised DCF-based TP of Rs2,628 (54.5x FY24E EPS).

Health, hygiene, and nutrition grew single digit; discretionary saw sequential recovery

Given strong pricing action, domestic business grew 11%, driven by 2% volume growth, led by home care (+23%), BPC (+7%), and foods (+3%) due to high base. GSK-CH portfolio saw 90% GTM integration, driven by penetration and distribution expansion strengthening consumer connect (>6.5mn) program. GSK-CH saw continued market interventions largely in rural markets. HUVR indicated that health, hygiene and nutrition portfolio saw penetration-led growth and sequential recovery in MT and strong growth in e-commerce – digitized demand captured 15%+ ordering. Considering Nielsen projections, the management confirmed moderating volume growth in rural, ahead of urban throughout Q3. The management expects the forthcoming budget would have lot of impetus on rural and put more money in the hands of consumer.

Operating environment remain challenging; commodity inflation remains elevated

In Q3, gross margin slipped 186bp to 52.1% due to elevated inflationary costs, led by palm (PFAD) +59%, crude oil (LAB) +57% and HDPE +26%. HUVR executed ~8-10% price increases to mitigate cost pressure – we believe this has not covered the full impact of inflation. This appears to be a conscious strategy to gain volume market share from unorganized players. EBITDA grew 14.9% and EBITDA margin was 25.0% (+99bp), despite rise in employee cost (+17.1%), and other expenditure (+5.8%), yet cut ad-spends (-14.3%). The management indicated margins to remain in tight range due to (a) continued inflation in RM/PM, (b) high freight costs, (c) cutin grammage to maintain price point, and (d) demand for value-for-money products.

Near-term demand outlook remains cautiously optimistic

The management stated that the next few months remain critical to get better understanding of underlying demand, as normalization of economic activities is underway. However, near-term demand outlook remains challenging due to slowdown in non-metro areas; yet, it expects rural demand to recover on the back good harvest and budget impetus. The company believes its focus on digital intervention to capture demand is gaining traction, driven by e-com, D2C and Ushop efforts, showing up in improved trajectory.

Valuation and risks

We expect gradual recovery in discretionary spends and inherent distribution strength to drive GSK-CH business. Margins could remain in tight range, given inflationary cycle and high ad-spends. Considering lower other income and higher tax rate we have trimmed earnings estimates by 8% and retain our ADD rating, with a revised DCF-based TP of Rs2,628 (54.5x FY24E EPS). Risks to our call include significant acceleration in volume/price, decrease in ad-spends leading to margin expansion, and lower competitive intensity.

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