IGI Logo

High inflationary environment affects demand

Key takeaways from HUVR’s end of the quarter (4QFY22) update

Demand environment

* Sharp inflation is affecting consumption. Cumulative growth, for categories in which HUVR is present, was flat with a high single-digit volume decline in JanFeb’21

* . The company performed relatively better.

* High inflation is affecting volume growth.

* Down trading is being witnessed towards lower unit packs (LUPs), but not yet towards lower-end brands.

* The mix is deteriorating both YoY and QoQ in a quarter where relatively higher mobility should have brought back demand of high margin beauty products. Instead, the customer is tightening their purse strings on premium purchases.

* There was a limited impact of the third COVID wave in 4QFY22.

* Demand for Laundry and Dish Wash was good, but was weak in other categories.

Margin to come under pressure

* The management had called out increasing RM pressures in its 3QFY22 result call. The Ukraine crisis has further exacerbated cost inflation, particularly in palm oil and crude-related RMs like LAB, soda ash, and packaging costs, all of which have seen a sharp sequential inflation. A greater impact of the Ukraine crisis will result in higher inflation in coming months.

* Industry ad spends have stayed at constant levels sequentially. With a deterioration in the mix and commodity inflation weighing down on margin, ad spends will not act as a buffer in protecting margin.

Valuation and view

* We highlighted the ongoing challenges of sharp commodity inflation across Staples players in our recent sector update note. The elevated input cost inflation led us to cut our FY23E/FY24E EPS for HUVR by 10.3%/8.4%. Nevertheless, the structural story for HUVR remains intact.

* HUVR’s earnings have underperformed that of peers in recent quarters owing to: a) a higher proportion of the Discretionary/OOH portfolio at 15-20% of sales, and b) steep commodity cost inflation in its three largest categories – Soaps, Detergents, and Dish Wash. Both these negatives continue to be at play with further material cost increases and delayed recovery in the growth in premium products.

* Earnings growth will bounce back to mid-teen levels once the abovementioned worries ebb. However, uncertainty remains over the next couple of quarters.

* We maintain our Buy rating with a TP of INR2,500 per share (55x Mar’24E EPS). However, HUVR does not feature among our top picks at present.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer