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* Hindustan Unilever (HUVR)’s 1QFY24 performance fell slightly short of our expectations. During the quarter, volumes grew 3% YoY vs. expectation of 7% growth, as higher inflation is adversely impacting consumer spending. ? In 1QFY24, rural market delivered volume growth. While we expect this momentum to continue; however weather patterns remain a critical factor to monitor.

* The company is normalizing A&P spends to revive volume and bring it back to pre-COVID levels, which represents 9.8% of sales. Management mentioned about funnelling the gross margin expansion towards adspends to drive volume growth. However, the 120bp YoY increase in ‘other expenses’ is due to a step-up in investments, the impact of new royalty incentives, and favorable benefits in the base quarter.

* The outlook for HUVR remains balanced with lower commodity costs and gradual recovery in rural demand offset by reduced leverage on pricing and increased competition from smaller players in some categories. We reiterate our BUY rating with a TP of INR3,100.

Performance slightly lower than estimated

* Reported net sales grew 6.1% YoY to INR151.5b (est. INR156.7b). EBITDA grew 8.4% YoY to INR35.2b (est. INR36.6b); PBT grew 9.8% YoY to INR34b (est. INR35.1b); PAT (bei) was up 9.2% YoY to INR25b (est. INR26.5b). * Underlying volumes grew 3% YoY (est. 7%) during the quarter.

* Segmental performance: Home Care (35% of total sales) revenues were up 10% YoY (four-year CAGR 11.9%), Personal Care (38% of total sales) revenues rose 4.4% YoY (four-year CAGR 5.1%), and Food & Refreshment business sales (25% of total sales) were up 4.7% YoY (four-year CAGR 18.1%).

* Segmental EBIT: Home Care margin improved 60bp YoY to 18.3% and Personal Care margin remained flat at 26.3% while Food & Refreshment margin expanded 200bp YoY to 17.9% in 1QFY24.

* Overall gross margins for the quarter expanded 260bp YoY and 120bp QoQ to 49.9% (est. 49.6%).

* As a percentage of sales, increase in ad spends (up 50bp YoY to 9.8%), and other expenses (up 150bp YoY to 12.6%) as well as staff costs at 4.3% resulted in EBITDA margin stood at 23.2% (est. 23.4%).

Management conference call highlights

* HUVR’s volume growth for the quarter was 3%, while the FMCG industry volumes grew in mid-single digit. However, on a two-year basis, while its volumes registered a CAGR of 5%, industry volumes were flat. ? Rural recovery appears promising, exhibiting volume growth during the quarter. However, it is crucial to monitor the current weather-related risks.

* Competitive intensity is rising as the share of smaller players increases in certain categories, driven by lower inflation.

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