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Growth performance disappoints, margin headwinds ahead; reiterate REDUCE

Result Highlights

* Result highlights  ‐ 9% volume growth and consumer revenue growth of 12%, margins down 110bps to 23.9% due to input inflation and higher A&P spends, adj. PAT growth of 4.4%, other income lower due to lower yields, premium portfolio grew 2x, 80% business continues to gain penetration vs FY20.

* Segmental growth ‐ Home care growth of 12% led by fabric wash and personal care, BPC growth of 13% led by hair care and skin care, foods growth of 12% led by continued momentum in in‐home portfolio; health, hygiene and nutrition portfolio (85% of business) grew 8%, discretionary portfolio (12% of business) grew 39% and OOH portfolio (3% of business) grew 91%.

* Price hikes ‐ Skin cleansing, laundry and tea portfolio saw another round of price hikes ~3% to pass on RM inflation, but still gained market share.

* Digital initiatives ‐ More than 10% total demand now captured digitally, Shikhar B2B app now at 5.5 lac stores, contribution up 6x yoy, e‐commerce contribution up 2x yoy, exploring D2C segment via UShop.

* Outlook – Expect strong recovery in discretionary segments, good monsoon should keep rural demand resilient, commodity prices to remain elevated, to be offset by cost savings and pricing actions

Valuation and view ‐ Revenue growth looks optically lower due to very low levels of trade promotions in base quarter, which normalized this time and should start reflecting in higher pricing growth from 2Q onwards. With urban demand especially on the discretionary side coming back and rural demand being resilient, growth rates should normalize from 2Q onwards. But the delay in realizing synergy benefits of the GSK acquisition on both sales and margin fronts coupled with margin headwinds act as key triggers for a cut in earnings estimates. We now build in a 11%/14% revenue/PAT CAGR over FY21‐24E. In this context, we believe the stock might find it difficult to continue trading at a premium to its historic valuations and might revert back to its long‐term average of 50x. We therefore, roll over our valuations to FY24 and given a limited upside, reiterate our REDUCE rating on the stock with a PT of 2,539 based on 50x FY24 earnings. While we like management initiatives on building digital capabilities, distribution ramp‐up, innovation and market development, we don’t see near‐term triggers which can lift up the growth trajectory and the same time, the solid margin improvement story of the last decade is also facing headwinds. A visible pick‐up in growth rate in the GSK nutrition business, sustained pick up in premium and discretionary categories coupled with a cool‐off in commodity inflation would make us turn positive on the stock again.

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