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Decade high market share gains

In line with our estimates, Hindustan Unilever’s (HUL) Q3FY22 net sales, EBITDA and adjusted PAT were up 10.4%, 14.9% and 17.6% on a YoY basis, respectively. Domestic volumes rose 2% YoY on a base of 4% YoY. Home Care led the growth (up 23% YoY) with Fabric Wash and Household Care growing in double digits. Market shares across the portfolio are above 2019 levels, with the highest market share gains in a decade this quarter. This was led by calibrated price hikes, which we believe is the right strategy despite 187bps YoY fall in gross margin.

Overall, an improving portfolio mix combined with cost control, price hikes and synergies from the GSK takeover should aid EBITDA margin despite inflationary input prices. Retain ‘BUY’ with a TP of INR2,960.

Robust performance; strong market share gains

What we like: Skin cleansing delivered double digit growth, driven by strong performance in Lux, Dove and Pears. Skin care and colour cosmetics delivered double-digit growth and are above pre-Covid levels. Tea delivered high teens two year CAGR. Ice creams saw a strong quarter, delivering two year CAGR in high teens. Market development actions resulted in strong market share and penetration gains in the HFD category. EBITDA margin expanded 99bps and is at a five quarter high.

What we don’t like: Volume growth of 2% YoY on a base of 4%. Food & refreshment segment grew 3% YoY. HFD witnessed a soft quarter due to a high base, lower market growths and pockets of disruption linked to sales integration

Other highlight: Industry has seen ad spend cuts. In our view, HUL’s ad spends remain competitive, despite the cut.

Q3FY22 conference call:

Key highlights 67% of the company’s portfolio grew double digit two year CAGR. 30% of the portfolio grew mid to high single digit two year CAGR. HUL expects more inflationary pressure in Q4FY22. Company will continue to take calibrated pricing action. Grammage cuts impacted volumes by about 2%.

Outlook and valuation:

On a firm footing; maintain ‘BUY’ We expect HUL to be a key beneficiary of strong rural demand. Demand situation is dynamic due to uncertainty around Covid-19. However, HUL is well placed in terms of supply chain preparedness. We retain ‘BUY/SO’ with a TP of INR2,960. The stock is trading at 51.4x FY23E EPS.

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