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What Markets Want

“What are the triggers” – that’s an important question which investors seek our opinion on. In our new series “What Markets Want” - we discuss potential triggers for stock outperformance and / or re-rating. In edition #1, we present the largest company (by market cap) in our coverage - HUL. Retain ADD. Underlying volume growth of HUL has been a tad underwhelming in recent times (volumes declined by 1% in 9MFY21). We note that this underperformance may potentially reverse given HUL’s focus on volume growth even at the expense of gross margins in the near-term (see report). Triggers: 1. Volume growth focus over margins leading to market share gains 2. Double-digit volume growth in nutrition business 3. Sequential recovery in detergents and growth in personal care products 4. Acceleration in new product launches

* Volume growth focus over margins leading to market share gains: A change in stance at HUL in favor of volume growth, in our opinion, will be a key driver for HUL stock’s outperformance in CY2021. In India, a “growth market”, investors tend to (rightly) ignore short-term profit sacrifice, provided the trajectory of volume outperformance is clear (as it’s DCF-accretive). Nestlé stock’s 43% outperformance between Oct’18 – Sep’19 driven by volume growth-led valuation rerating, despite weak earnings, is a case in point. We believe that this strategy is already playing out in categories facing inflationary input cost trends like tea, soaps and detergents.

* Double-digit volume growth in nutrition business: In our view, the likely cannibalization of 500gm refill pack by 500gm pouch pack in nutrition portfolio imply either a steep gross margin decline and/or re-investment of potential synergy benefits from GSK acquisition. We believe that such steep price cut may be potentially viewed as negative by consensus if it does not lead to double-digit volume growth (nutrition business reported double-digit revenue growth in Q3FY21). If HUL is successful in consistently delivering double-digit volume growth in nutrition, it likely implies recruitment of new consumers (higher penetration) apart from higher usage. Driving premiumisation can happen later on – a potential stock rerating event.

* Sequential recovery in detergents and growth in personal care products: Detergents and premium personal care categories growth had struggled as consumers were staying at home as offices still were allowing work from home and schools and colleges were also largely closed during last year despite lifting of lockdowns. As consumers start venturing out of home driven by opening up of these institutions will likely lead to an upsurge in consumption leading to faster recovery and growth. Further, likely shift of consumers from a hygiene positioned soaps to beauty / fragrance positioned soaps as fear of covid reduces would also lead to premiumisation (shift from Lifebuoy to Dove, Pears etc.). However, a second wave of covid leading to localized lockdowns could delay this.

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