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In line numbers; EBITDA margins to recover with lag

* While headline numbers were close to expectations, this was aided by lower ad-spends and employee costs, which somewhat offset the lowest gross margin levels since 4QFY12.

* Management commentary indicated that material cost pressures may have peaked out, but with ad-spends reviving, we expect EBITDA margin improvement to earlier levels to arrive with a lag. Post this, we expect HUVR to get back to the erstwhile pace of mid-teens earnings growth that it consistently demonstrated in the five years before covid. We reiterate our Buy rating on the stock.

In-line performance

* Reported net sales grew 15.9% YoY to INR147.5b in 2QFY23 (in-line). EBITDA grew 7.8% YoY to INR33.8b (in-line), PBT grew 9% YoY to INR32.2b (in-line) and PAT (bei) was up 8.8% YoY to INR23.8b (in-line).

* Underlying volumes were up 4% in 2QFY23 (est. 5%).

* Segmental performance: Home Care (35% of total sales) revenues were up 34% YoY (3-year/4-year CAGR 15.1%/13.7%), Personal Care (38% of total sales) were up 11.2% YoY (3-year/4-year CAGR 7%/6.5%), and Food & Refreshment business sales (25% of total sales) were up 3.7% YoY.

* Segmental EBIT: Home Care margin declined 170bp YoY to 17.3% and Personal Care margin contracted 270bp YoY to 25.1%. However, the Food & Refreshment segment margin expanded 150bp YoY to 19.8%.

* Overall gross margins for the quarter contracted 580bp YoY to 45.8% (est. 47.9%).

* As a percentage of sales, lower operating expenses (-180bp YoY to 11.1%), ad spends (-250bp YoY to 7.1%), and flat staff cost (+20bp YoY to 4.8%) restricted EBITDA margin contraction to 170bp YoY to 22.9% (est. 23.3%). Absolute ad spends were down 14.3% YoY to INR10.4b.

* 1HFY23 sales/EBITDA/PAT(bei) grew 17.8%/10.8%/12.5% YoY.

Management conference call highlights

* Sep’22 has been better overall than Jul-Aug’22, led by modern trade recovery and some benefits of the early festive season.

* Rural CPI inflation is higher than urban. Rural consumers have reduced purchase frequency and lowered discretionary purchases.

* The management expects gross margins to improve sequentially in 3QFY23, led by lower palm oil costs. Adspends are likely to be increased going forward.

* The company has taken further price increases in fabric wash and household care in 2QFY23. On the other hand, price cuts are being taken in big chunks in the skin cleansing segment.

* Effective tax rate is likely to be ~24% in FY23.

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