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Resilient quarter amid challenging enviornment

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.

* Standalone revenue up 11.2% YoY on the back of an underlying 4% growth in volumes led by demand pickup in rural areas.

* EBITDA margin expanded 70 bps QoQ to 24.6% despite high input cost inflation seen during the quarter. Adj. PAT grew 4.8% QoQ (+4.6% YoY).

* Company declared an interim dividend of Rs. 15 per share.

* HUL managed to maintain healthy margins despite rise in input costs. Upcoming festive season and pickup in demand in the urban areas should drive volumes and aid company performance. We upgrade our rating on the stock to BUY with a revised target price of Rs. 2,840 based on 62x FY23E Adj. EPS.

Topline improves on the back of volume growth

Q2FY22 standalone revenue grew 11.2% YoY to Rs. 12,724cr (+6.8% QoQ), driven by strong performance across all divisions, with over 75% of the business witnessing gains in market share and penetration across categories. Among its verticals, Home Care segment reported sales of Rs. 3,838cr (+15.7% YoY, +1.1% QoQ) on the back of strong double-digit growth in fabric wash. Beauty & Personal Care (BPC) segment sales stood at Rs. 5,000cr (+10.3% YoY, +9.3% QoQ), largely driven by haircare, skin care and colour cosmetics. Foods & Refreshment (F&R) segment recorded 7.2% YoY growth in sales at Rs. 3,622cr (+9.1% QoQ), primarily led by tea business and acceleration in market development activities for health food drinks.

Margins stabilise despite inflationary headwinds

Brand power, large number of distribution outlets, coupled with execution prowess has enabled the company to sequentially raise consumer pricing, thereby offsetting the inflationary pressure from input costs. EBITDA grew 10.0% QoQ to Rs. 3,132cr (+9.2% YoY), with EBITDA margin expanding 70bps QoQ to 24.6% on volume growth. Operating margin for Home Care and F&R improved to 19.0% and 18.3%, respectively vs. 17.4% and 18.1% in Q1FY22, while BPC margins contracted to 27.8% vs. 28.1% in Q1FY22. Adjusted PAT for the quarter grew 4.8% QoQ to Rs. 2,187cr (+4.6% YoY), partially impacted by lower other income (-25.2% YoY) and higher taxes (+17.6%).

Key concall highlights

* Palm Oil, crude oil, packaging and freight remain inflated, whereas tea prices softened compared to last year.

* More than 15% of demand is captured digitally, with Shikhar - eB2B app now made available in more than 6.5 lac stores.

* D2C platform launched for 4 beauty brands – Lakme, Simple, Love Beauty and Planet and Dermalogica, with Lakme alone getting +2mn visitors per month, contributing to 30% online sales.

Valuation

Decent monsoon helped improve consumer sentiments in the rural regions, thereby restricting impact from inflationary cost pressures and driving volumes during the quarter. Though volume growth is expected to run ahead of sales growth in the nearterm and despite input costs set to rise, we expect HUL to continue to maintain steady performance on the back of a demand pickup seen in the urban areas and the coming festive season. We hereby upgrade our rating to BUY with a revised target price of Rs. 2,840 based on 62x FY23E Adj. EPS.

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