Reduce Hindustan Unilever Ltd For Target Rs. 2,737 - Yes Securities
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Rural dents volume growth, demand and margin headwinds remain; maintain REDUCE given limited upside
Our view
Although underlying volume growth was a tad better than last quarter, a 4% growth on a base of 1% looks disappointing to us. Given the headwinds to rural demand, sharp price hikes and a high base for 2HFY22, the company can disappoint on overall growth for FY22. While the sharp recovery in discretionary categories is a positive, we still expect gross margins to remain under pressure for the year given the persistently high commodity inflation.
The nutrition business saw signs of picking up post the market development efforts from the company, but other foods businesses are witnessing soft growth trends. FMCG demand especially in rural areas has slowed down in the months of August and September and the pace of normalization of economic activity and inflation impact would be key monitorable to gauge the demand trends.
Result Highlights
* Result highlights ‐ Muted 4% volume and 7% pricing growth driving revenue growth of 11%, margins down 50bps to 24.6% mainly due to input inflation which resulted in 140bps GM decline partially offset by cost savings, adj. PAT growth of 4.6%, 75% business continues to gain penetration.
* Segmental growth ‐ Home care growth of 15% led by laundry and dish wash, BPC growth of 10% led by premium beauty, hair care and skin care, foods growth of 7% led by tea and double‐digit volume growth in Horlicks; health, hygiene and nutrition portfolio (85% of business) grew 7%, discretionary portfolio (12% of business) grew 31% and OOH portfolio (3% of business) grew 74%
Valuation
We adjust our estimates lower to factor in slightly lower margins and now build in a revenue/EBITDA/PAT CAGR of 11%/13%/12% over FY21‐24E. While we remain structurally positive on the company prospects, we find higher upside potential in peers as we see very limited upside in the stock even after ascribing a premium multiple of 55x (50x historical average) on FY24E earnings.
We maintain our REDUCE rating with a PT of Rs 2,737 based on 55x FY24E earnings. A sustained momentum in discretionary categories and nutrition business and a sharp cool‐off in commodity inflation will make us turn positive on the stock
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