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Beat on all fronts; medium-term outlook promising

* Hindustan Unilever (HUVR) reported a good set of numbers on all fronts in 4QFY21, led by a recovery in its Discretionary portfolio and Detergents.

* Two-year average like-to-like sales growth has now improved to 5.8% in 4QFY21 from minor decline in 1QFY21. Ongoing lockdowns would result in a temporary impact on high-margin discretionary product sales, leading to a 4.3% EPS reduction in FY22E; we have retained our FY23E forecasts. We continue to monitor the situation as it unfurls.

* HUVR is likely to resume the strong earnings growth path from the preCOVID era (~18% CAGR in the four years ended FY20), led by the same factors – a successful Winning in Many Indias (WIMI) strategy, a technological edge, and cost-saving plans, as well as newer factors such as expected synergies from GSKCH and sustained growth and premiumization in Skin Cleansing. Maintain BUY.

Performance ahead of expectations

* Net sales grew 34.6% YoY to INR121.3b in 4QFY21 (est. INR117.2b). EBITDA grew by 43.2% YoY to INR29.6b (est. INR28.3b), PBT grew 37% YoY to INR28.1b (est. INR26.5b), and PAT (bei) was up 43.2% YoY to INR21b (est. INR18.1b).

* Domestic Consumer business sales grew 21% YoY, with underlying volume growth of 16% YoY excl. GSKCH (est. 14%) – we believe volume growth would have been 31% YoY incl. GSKCH (est. 28%).

* Segmental performance: Home Care (32% of total sales for 4QFY21) revenues were up 14.6% YoY. Personal Care sales (37% of total sales) were up 19.7% YoY. Food & Refreshment sales (29% of total sales) were up 96.4% YoY (+26% excluding the impact of the GSKCH merger and VWash acquisition).

* Segmental EBIT margin: Home Care margins expanded 220bp YoY to 21.1%. Personal Care margins expanded 270bp YoY to 27.5%. Foods & Refreshments margins expanded 380bp YoY to 16.4%.

* Overall gross margins for the quarter contracted 120bp YoY to 52.6%.

* As a percentage of sales, lower operating expenses (down 170bp YoY to 12.2%), lower ad spends (down 130bp YoY to 11.6%), and higher staff cost (up 40bp YoY to 4.3%) led to EBITDA margin expansion of 150bp YoY to 24.4%.

* FY21 sales/EBITDA/PAT growth stood at 18.6%/18%/21.3% YoY.

* The company has declared a final dividend of INR17 per share. This, along with interim dividend (INR14 per share) and special dividend (INR9.5 per share), leads to a total dividend of INR40.5 per share for FY21.

Highlights from management commentary

* The company took price increases in Skin Cleansing in 3QFY21 and 4QFY21 and would take increases going forward as well.

* The company has also taken price increases in Tea and reversed the earlier price cuts in Detergents.In the GSKCH business, penetration and volume growth are the key focus areas; the company delivered volume growth in the high teens, with UVG growth (which includes the mix) in the early double digits.

* In FY21, the company introduced an INR2 sachet for Horlicks and Boost, increased grammage on the INR5 sachet, and increased distribution reach significantly – the benefits of which are likely to reflect in subsequent years.

Valuation and view

* While we have cut our EPS forecasts for FY22E by 4.3% on account of the COVIDled disruption and higher-than-anticipated tax rates, there is no material change to our FY23E EPS. We continue to monitor the situation as it unfurls.

* The company’s earnings growth has gained further momentum in recent years before COVID (an ~18% EPS CAGR in the four years ended FY20 v/s a ~12% CAGR over the 10 years ended FY20). This is particularly impressive given the weak mid-single-digit earnings growth posted by (much smaller) peers in recent years.

* HUVR’s best-of-breed analytics and execution capabilities (demonstrated via the successful implementation of the WIMI strategy, cost-saving plans, herbals, etc.) are key factors driving the pace of earnings growth. The strong outlook on rural, GSKCH synergies, and sustained growth and premiumization in Skin Cleansing offer further medium-term tailwinds.

* Maintain Buy with a TP of INR2,780.

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