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Widening its leadership position

Here are some key takeaways from HUVR’s FY22 Annual Report:

* Gaining market share: HUVR now has 16 brands with over INR10b in annual sales (v/s 14 brands in FY21). In FY22, its gain in market share was the highest in more than a decade.

* Strengthening its technological backbone: HUVR continues to evolve as a digitally capable enterprise, catering to emerging consumer needs. The core business continues to use analytics and machine learning to improve efficiency. It is leveraging economies of scale, while remaining nimble. HUVR has always been ahead of its peers in terms of technology adoption and analytics, and continues to widen its lead.

* Bringing technology to general trade: HUVR’s B2B app – Shikhar – is now present in 800k outlets. The app enables zero-touch online ordering and has helped solve two of the biggest challenges that retailers face - capital (tie-up with SBIN for financing) and space (quicker inventory turnover with a faster fulfillment). Shikhar has been HUVR’s response to the increasing prevalence of new-age B2B distribution platforms. Its continued adoption by retailers will only strengthen its GT ecosystem.

* Winning in Many Indias (WIMI): HUVR’s regionalization strategy continues to focus on delivering relevance across different regions through product design and differentiated marketing. Some of the tangible benefits that this strategy has helped deliver are as follows:

* In BPC, HUVR designed and introduced region-specific products based on consumer needs. Its market share in Hair Care touched a 15-year high in CY21.

* Even in Skin Care, it developed a moisturizer designed to perform in hot and humid weather conditions under Ponds to improve adoption.

* Customizing of its Tea portfolio, to cater to regional tastes, led to a growth in market share.

* SKB business update: in FY22, it expanded the reach of the Nutrition business by integrating it with HUVR’s sales systems and processes. It is building category relevance by educating consumers on the need for adequate nutrition and driving penetration through market development and access packs.

* Beauty and Personal Care (BPC): HUVR has three digital-first brands – Simple, Love Beauty & Planet, and Baby Dove. It is investing in e-commerce ahead of the curve. In the Premium Beauty portfolio, it is driving market development through innovations and extensive sampling. Lakme’s D2C websites are seeing 2m customer visits per month and 30% of sales are accruing through the digital channel. Strengthening focus on D2C offerings will potentially help HUVR ward off competition brought about by new age BPC platforms.

* Home Care: Liquid detergents and fabric conditioners grew four times in the last five years to become an INR17b business. Surf Excel is now the biggest laundry brand.

Valuation and view

* HUVR continues to place the building blocks for future growth and has been able to do so ahead of its peers. It continues to display the dexterity shown over the last decade, despite its larger size, even as it continues to grow v/s its peers.

* The company continues to strengthen the key drivers of its success in India over the last decade, including: a) pioneering the use of technology to generate data and facilitate decision making, b) focusing on decentralization and localized strategies based on its WiMI framework; c) recognizing trends and investing in them early on; d) funneling cost savings back into the business; and e) its strong execution ability, which has led to a positive momentum in earnings.

* Its pre-COVID earnings had been extremely strong. It reported ~18% EPS CAGR in the four-years ending FY20, before steeper commodity cost inflation (v/s peers) and the over-indexed discretionary portfolio adversely impacted its earnings in FY21 and FY22. The company’s pre-COVID earnings growth was particularly impressive, given the weak mid-single-digit growth posted by its (much smaller) Staples peers over the same period. Once the ongoing high material cost environment abates, we believe HUVR could revert to mid-teens earnings growth.

* HUVR is the best prepared among peers on the technology as well as the ecommerce strategy front to deal with potentially significant disruptions ahead.

* We maintain our Buy rating on the stock with a TP of INR2,700.

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