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HUL’s Jun-Q earnings were lower than what we would have liked. Whilst gross margin buildback is tad better than we expected, volume acceleration is taking longer than desired as consumer-habits are taking some time to normalize - management expects this to be a twothree-quarter phenomenon. The company continues to be hopeful of a recovery in rural demand but weather-related risks in the equation have gotten more prominent. Competitive pressures have also picked up - aggression of smaller players in select categories, media intensity in general. The template for FY24E, as we stated earlier, would be an entirely volume-driven single-digit sales growth with strong gross margin expansion but part of it getting offset by the need to up A&P that has been run down by >350bps over the last three years. While we see potential for a double-digit return from the stock over the coming year, we believe valuation-multiple could get capped given a tougher operating landscape.

* Volume acceleration taking time even as pricing-growth continues to fade as expected: HUL reported 6.5%, 8.4% and 9.2% growth in sales, EBITDA and adjusted net profit to INR149.3bn, INR35.2bn and INR25bn. Revenue performance was just a tad below our expectation with volume growth a bit softer at 3% but partly made-up through a shadehigher growth from pricing (3.4%) vs what we anticipated. Management alluded to a challenging market context and some lag between implementation of price-cuts and the benefits actually reaching the end-consumers. Trade stock reduction by a few days in anticipation of price-cuts further compounded the growth issue. Segmentally: 1) Homecare growth is now expectedly softer vs the run-rate seen through FY23, given a much lower price-led growth. The segment still grew 10% with mid-single-digit growth in volumes. Key to monitor here would be the resurgence of the small and regional players and how HUL deals with the same. Premiumisation remains a positive driver. 2) BPC growth was modest at just 4.4% - entirely volume-led with Soaps pricing now down on yoy comparison, but quality of growth appeared decent with double-digit growth in Skincare and Colour Cosmetics, mid single-digit volume growth in Hair-care. Oral-care, not a strong point for HUL otherwise, also grew in high double-digit this time round. 3) F&R was weak at +4.7% with near-flat volumes, due to continued consumer-downgrading in Tea and consumption-impact on ice creams due to unseasonal rains. HFD, on the contrary, seems to have had one of its better quarters, off a weak base though.

* Gross margin build-back a tad ahead of expectation but higher SG&A curtailed flowthrough to bottomline: Gross margin benefitted from the reversal in inflationary trend in the costs of certain key inputs and expanded 279bps yoy, 137 bps qoq to 49.2% which is c.50bps ahead of our forecast. Ad-spends, however, rose 11.5% - much higher vs our expectation of c.5% - with spends for the market now getting closer to 2019 levels. The other noticeable trend in the industry is that of resurgence of smaller players in select categories with smaller players’ growth far outpacing that of the larger ones in categories like detergent bars and tea. A&P apart, Other Expenses also grew at a much higher pace vs topline (c.20% with additional c.4% on account of the higher royalty paid to Unilever) which had a c.150bps impact on margin – management cited expenses related to ‘capability-building’ to be one of the reasons. Consequently, flowthrough of GPM benefit to EBITDA was lower with EBITDA margin up only 42bps to 23.6% vs JMFe 24.5%.

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