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Sales in line; some margin pressure emerging

* HMN’s 4QFY21 sales/volume growth of 37%/39% was broadly in line with our estimate. Albeit, aided by advance summer season sales in 4QFY21, unlike the same quarter last year, two-year average growth has now been in the 7.5-10% range in the past three quarters, far better than the 3.7% CAGR growth in the five years ended FY20.

* There was a significant miss of ~30% on the EBITDA front v/s our expectation due to increasing material cost pressures and a sequential increase in ad spends as a proportion of sales. While the company has taken/is in the process of taking an overall price increase of up to 4% by Jun’21, if we take the median of their gross margin guidance of 66.5% to 67%, there is likely to be ~100bp lower gross margin in FY22E.

* Whether HMN is able to sustain or surpass the better than usual sales momentum witnessed in the past three quarters, remains to be seen, especially if seasonality and rural momentum turn out to be less favorable than recent quarters. Nevertheless, valuations of 26.7x FY23E EPS still leaves room for an upside. Maintain Buy.

Sales in line; margin disappoints due to a sharp RM inflation

* Consolidated net sales grew 37.2% YoY to INR7.3b (est. INR7.5b). EBITDA/PBT/adjusted PAT before amortization grew 65.2%/104%/52.4% YoY to INR1.6b/INR1.8b/INR1.5b (est. INR2.4b/INR2.2b/INR1.8b).

* Domestic volumes increased 39% YoY in 4QFY21.

* Gross margin fell 250bp YoY to 62.7% due to a sharp increase in raw material prices.

* EBITDA margin expanded 380bp YoY to 22.3% (est. 31.7%) due to lower employee costs as a percentage of sales (-310bp YoY), flat ad-spends (-10bp YoY), and lower other expenses (-310bp YoY).

* Absolute ad-spends grew 36.5% YoY to INR1.3b.

* The domestic business grew 44%/10% YoY in 4Q/FY21.

* International sales grew 28%/12% YoY in 4Q/FY21.

* Institutional business (3% of sales) declined 3%/19% YoY in 4Q/FY21.

* Revenue/EBITDA/adjusted PAT before amortization growth in FY21 stood at 8.5%/27.9%/25.3% YoY.

* OCF/FCF showed rapid growth at 74.7%/134.5% YoY to INR9.2b/INR8.9b in FY21.

* Within domestic, HMN reported sales growth in all categories in 4QFY21: Healthcare (+67% YoY), BoroPlus (+500%), Navratna (+28%), Kesh King (+45%), Pain Management (+38%), Male Grooming (+26%), and 7 Oils-inOne (+39%).

Highlights from the management commentary

* While COVID-19 and the resulting lockdown have affected demand in the peak summer months, performance is much better so far v/s 1QFY21.

* While Healthcare is still a small portion (less than 7%) of HMN’s sales, the management expects this business to grow over 20% in FY22, despite a 45% growth in FY21.

* The company has taken/will take a 4% price increase (including planned ones in Jun’21) at an overall level to combat RM inflation. The management expects gross margin of 66.5-67% in FY22E.

* There was a one-off other income of INR280m in 4QFY21.

Valuation and view

* There is no material change to our FY22E/FY23E EPS forecast.

* While it is too early to call out the structural recovery in sales, the third successive quarter of two-year average sales of 7.5-10% is encouraging. We maintain our Buy rating, encouraged by various factors: a) valuations are inexpensive at 26.7x FY23E EPS, b) sale of the Cement business has led to a reduction in pledged shares (now at 30% levels), and c) just like other peers with higher rural salience, HMN too can expect tailwinds over the next few quarters (~50% of HMN's domestic sales comes from rural India).

* We arrive at our TP of INR580/share (valuing the company at 30x June FY23E EPS, a 40% discount to its peers).

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