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Hindustan Unilever (HUL), a subsidiary of Unilever PLC, is India’s leading FMCG company. It has over 35 brands across 20 categories, such as soaps, detergents, shampoos and skin care. • HUL clocked a 6.5% YoY revenue growth in 1QFY24, mainly driven by double-digit growth in the HC segment (10% YoY). • EBITDA grew 8.4% YoY, with margins expanding just 40bps YoY, due to higher operating expenses. • The company sustained improvement in its market share for almost 75% of its business through better operating efficiency and a premium portfolio. Moreover, positive outlook from rural as well as urban areas is expected to drive volume growth and support earnings in the near term. Hence, we reiterate our BUY rating on the stock with a target price of Rs. 2,900, based on 54x FY25E adjusted EPS.

Volume and price growth support topline performance

HUL’s revenue rose 6.5% YoY to Rs. 14,931cr in 1QFY24, driven by growth across the segments with an underlying volume growth of 3%. On a segmental basis, Home Care segment (HC) revenue grew 10% YoY, due to strong performance in household care and fabric wash segments. Double-digit value and volume growth, mainly in dishwash business, supported strong performance in household care, while premium portfolio supported double-digit growth in the fabrics business. The Beauty & Personal Care (BPC) segment grew 4.4% YoY, owing to double-digit growth in color cosmetics, skin care and oral care business. In the Foods & Refreshment (F&R) segment, revenue rose 4.7% YoY, supported by strong performance in Health Food Drinks as well as Ketchup and Food Solutions businesses.

Higher operating expenses limit EBITDA margin expansion

Gross profit grew 11.9% YoY, with a 242bps YoY margin expansion in Q1FY24. However, benefit from price declines in a few commodities was limited for EBITDA, owing to higher employee expenses (up 9% YoY), ‘selling, marketing and distribution’ expenses (11.5% YoY), and an increase in other expenses (20.2% YoY). Step-up of investments in building capabilities and new royalty led to a sharp increase in other expenses. Thus, EBITDA grew 8.4% YoY to Rs. 3,521cr in Q1FY24, with the margin expanding just 40bps YoY.

Key concall highlights

• FMCG industry volume grew in mid-single digits, supported by the urban region, while rural-volume growth turned positive this quarter. • HUL management expects flattish price growth or decline in prices in the near term and would focus on volume growth, assuming prices remain at the current levels. • Intense competition due to increase of smaller players share in certain categories.

Valuation

HUL is able to gain market share in 75% of its business through premiumisation and sustained efforts to improve operational efficiency. Healthy volume growth in urban regions and positive volume growth in rural areas look promising in the near term. Moreover, the recent fall in key raw material prices – palm oil and crude oil – would support volume growth in the coming quarters. The stock is currently trading at 48.1x P/E on FY25E adjusted EPS. This is lower than 5-year historical average of 58x. We, therefore, reiterate our BUY rating on the stock with a target price of Rs. 2,900 using a target multiple 54x P/E on FY25E adjusted EPS.

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