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Strong operating performance despite inflation and demand concerns, Downgrade to NEUTRAL due to limited upside

Our view

HUL delivered a better than expected performance driven by 6% volume growth while overall market witnessed mid?single digit volume decline. While calibrated price hike to c.12% translated to 19% revenue growth, 20% inflation impacted margins adversely. Volume growth has been soft for rural market for three quarters now, but well ahead of industry growth which saw a high single?digit decline. Company’s ability to control expenses and increase prices while maintaining share has been commendable as it was able to deliver stable operating margin despite 300bps gross margin contraction. Strong performance from Home care and BPC portfolio was another positive in Q1 while skin care and nutrition was soft due to the discretionary nature. Resilient growth despite significant price hikes indicates the strong brand saliency and product superiority. We expect growth in the near?term to remain pricing and mix?led as volume growth should remain in mid?single digit till inflation cools off and disposable incomes start increasing which is expected in H2FY23. The nutrition business continues to show signs of picking up post the GTM integration and market development efforts from the company. We still expect the growth to sustain in double? digits going forward as the company benefits from its WIMI strategy and wide portfolio albeit margin trajectory should come off in before building up again from late FY23 onwards. We downgrade from Add to NEUTRAL rating as stock has run up recently. The company is well placed to tackle this transient inflation?led soft volume growth period with offsets like cost/productivity levers coupled with and continued innovation and premiumization.

Result Highlights

* Revenue – Standalone revenue grew 19.8% to Rs142.7bn with 6% volume growth, home care growth at 29.9%, BPC growth at 17.3% and foods growth at 9.3%.  

* Gross margins – Gross margins plunged 300bps/210bps YoY/QoQ to 47.4% registering new lows led by continued inflation in input costs. Pricing/mix growth stood at 12% during the quarter. EBITDA margin came in at 22.8%, lower by 110bps/130bps YoY /QoQ owing to lower price hikes, higher A&P spend partially offset by lower other expenses during the quarter.

* PAT – PAT growth of 10.3%YoY with PAT coming in at Rs23bn.

* Segmental growth ? Home care growth of 29.9% led by laundry and dish wash, BPC growth of 17.3% driven by strong performance from premium portfolio and price led growth, foods growth of 9.3% on a high base owing to moderate growth in tea portfolio.

Valuation

We increase our EPS estimates by 5?6% and now build in a revenue/EBITDA/PAT CAGR of 13.6%/14.2%/15.2 over FY22?24E. As the stock has run up recently, we downgrade from an ADD to Neutral rating with a revised PT of Rs 2,624 based on 50x FY24E earnings. Despite near?term margin concerns, we remain structurally positive on the company and recommend to keep adding the stock on any declines with a re?rating expected as soon as inflation starts cooling off.

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