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Margin outlook improving; rural recovery essential

* HMN reported better-than-expected sales in 4QFY23 (up 8.8% YoY). The overall domestic volumes grew ~2%, while organic business volumes continued to decline, affected by persistent weakness in rural and summer portfolio due to excessive unseasonal rainfall in some parts of the country.

* The management has guided for a ~200-250bp expansion in gross margin going ahead and expects A&P spends to be ~17% of sales. It is also encouraging to see growth in D2C brands (The Man Company grew ~40%) and the management expects growth of ~50-60% YoY in D2C brands in FY24.

* We reiterate our BUY rating, as 1) HMN with over 50% of sales from the rural segment could be a beneficiary of a gradual rural revival; 2) valuations are inexpensive at 20xFY25E EPS; 3) improving revenue performance and investments in terms of rural distribution expansion and ad-spends in recent years

Overall beat

Consolidated net sales grew 8.8% YoY to INR8,360m (est. INR7,845m)

* EBITDA/PBT grew 21.9%/10.5% YoY to INR1,998m (est. INR1,813m)/ INR1,872m (est. INR1,628m). Adjusted PAT before amortization fell 4.6% YoY to INR1,806m (est. INR1,221m).

* Domestic volume grew ~2% YoY.

* Gross margin expanded by 60bp YoY but contracted 270bp QoQ to 63.1%. (est. 62.5%). EBITDA margin too expanded by 260bp YoY but contracted by 600bp QoQ to 23.9% (est. 23.1%) due to higher other expenses/employee costs (up 120bp/70bp) and lower ad-spends (down 390bp YoY).

* Absolute ad spends declined 13.3% YoY to INR1,297m.

* In FY23, sales grew 6.9% YoY to INR34b and EBITDA/adjusted PAT before amortization declined by 9.4%/8.8% YoY to INR8.6b/INR7.7b.

* International sales grew 19% YoY, driven by MENA, CIS and SAARC.

* Domestic segmental revenue performance YoY in 4QFY23: Navratna (-3%), Pain Management (-9%), BoroPlus (-25%), Kesh King (+1%), Male Grooming (+29%), Healthcare (-13%).

Highlights from the management commentary

* The management expects that the domestic business will grow ~8-10% and the international business will grow above ~20% in FY24.

* Due to lower input costs, both gross margin and EBITDA margin are likely to improve in FY24.

* Both e-commerce and modern trade performed well growing 64% and 18% YoY respectively.

* In FY23, HMN launched 20 new products, with a majority of digital brands in the Zandu platform.

* They added 31,000 chemists in FY23 increasing the total to 130,000. It reaches ~52,000 towns and villages and intends to add another 8,000 in FY24

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