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Resilient quarter; Outlook intact

Hindustan Unilever (HUL), a subsidiary of Unilever PLC, is India’s leading FMCG Company. It has over 35 brands spanning across 20 distinct categories, such as soaps, detergents, shampoos and skin care.

* Q3FY22 standalone revenue up 10.4% YoY to Rs. 13,092cr (+2.9% QoQ), driven by calibrated pricing actions to combat inflationary pressures.

* EBITDA margin expanded 90bps YoY to 25.0% despite cost inflation, largely owing to reduction in A&P spending and other expenses. Adj. PAT grew 4.8% QoQ to Rs 2,292cr (+16.8% YoY).

* With its strong brand power, diversified portfolio, increasing market share and wide distribution network, the company is well positioned to deal with near-term uncertainties. Ongoing measures like grammage reduction on certain products will aid combat input cost inflation in future. We reiterate our BUY rating on the stock with a rolled forward target price of Rs. 2,630 based on 54x FY24E Adj. EPS.

Calibrated pricing actions help drive topline growth

Standalone revenue grew 10.4% YoY to Rs. 13,092cr (+2.9% QoQ) in Q3FY22, aided by product price increases to offset input cost inflation. However, HUL’s strategy to stop the same via grammage reduction on certain product packs impacted its volume growth, especially in rural markets. Among its verticals, Home Care segment recorded 23.0% YoY growth in sales to Rs. 4,193cr (+9.2% QoQ), largely driven by strong broadbased performance in fabric wash and household care. Beauty & Personal Care (BPC) segment grew 6.9% YoY to Rs. 5,175cr (+3.5% QoQ), led by strong double-digit growth in skin care and colour cosmetics. Foods & Refreshment (F&R) segment rose 3.3% YoY to Rs. 3,466cr (-4.3% QoQ), due to solid performance in tea business and ice creams.

Margins expand on reduced A&P spends

EBITDA grew 14.9% YoY to Rs. 3,279cr (+4.7% QoQ), with EBITDA margin expanding 90bps YoY (+40bps QoQ) to 25.0%, mainly due to reduced A&P spends, which stood at 9.1% (-260bps YoY; -40bps QoQ) and lower other expenses at 13.0% of sales (-50bps YoY; +10bps QoQ). EBIT margin for Home Care, BPC and F&R verticals stood at 20.6%, 27.8% and 18.6%, respectively vs. 19.0%, 27.8% and 18.3% in Q2FY22. Adjusting for exceptional items, PAT grew 16.8% YoY to Rs. 2,292cr (+4.8% QoQ).

Key highlights

* HUL witnessed highest YoY market share gains in more than a decade, in both rural and urban markets, across price segments and back to above FY19 levels.

* Company introduced several new innovative products during the quarter under its BPC vertical, such as ‘Dove Body Love’ range of moisturizers, serums under the clean beauty brand ‘Simple’, a new toothpaste ‘Sensitive Mineral Active’ launched in Tamil Nadu, and new concealer and volume mascara under the ‘Lakme’ range.

* Under the Foods & Refreshment vertical, ‘Kissan Peanut Butter’ and ‘Hellman’s Mayonnaise’ continued to perform well, while ‘Bru Beaten Coffee’ was launched.

Valuation

Trusted brands, wide portfolio, agile and flexible supply chain and growing consumer franchise augur well for the company to protect its business model. Calibrated pricing actions coupled with cost agility and savings program will continue to offset input cost inflation in future. Maintaining our positive outlook, we reiterate our BUY rating on the stock with a rolled forward TP of Rs. 2,630 based on 54x FY24E Adj. EPS.

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