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Resilient operating performance; pace of recovery in volumes will be key

HUL’s 2QFY26 Consol. sales grew 2% YoY with flat UVG (GST transition had 2% impact on growth). EBITDA was ahead of our/street est. by c.3-4% with margins at 23.2%; led by better gross margins (c.100bps ahead of our est.). Segmentally, beauty & wellbeing did well, while personal care (soaps)/home care (detergent) performance were weaker than envisaged. We like new CEO Priya Nair’s emphasis on prioritising volume-led revenue growth and accelerate performance by sharpening focus on 4 strategic pillars – radical consumer segmentation, modernising core portfolio, strengthen sales capabilities (allocate more resources to e-comm, chemist/cosmetic stores) and scale up in high growth demand spaces. Management commentary remains optimistic on volume growth – expects uptick from H2 with step up in portfolio interventions backed by favourable macros. Although acceleration won’t be immediate as restocking happens gradually. Hence, pace of channel restocking (likely normalisation of trading conditions from November) and onset of winters will be key monitorable in the near term. On the profitability front, management expects to sustain current level of margins (which is closer to upper end of its guidance of c.22-23%). Demerger of low margin ice-cream business (c.3% of sales & low-single-digit EBITDA margins) is expected in 3Q which should lead to 50-60bps improvement in reported EBITDA margins. While NTM valuation of 56.5x restricts upside, we stay constructive and expect execution to improve under new CEO (we estimate c.10% EPS CAGR over FY26-28E). We cut our estimates by c.2-3% to factor in GST transition impact & lower other income; roll forward to Dec’27E and maintain ADD with revised TP of INR 2,770.

* Inline revenues; better than envisaged gross margins drives earnings beat: Consol. sales grew 2% YoY to INR 160.6bn (inline) led by carry forward pricing across skin cleansing, beverages and skin care as UVG was flat YoY. Sales performance was impacted due to GST-led disruption and prolonged monsoons, both of which are transient in nature. Gross margins at 50.9% (better vs. JMFe: 49.9%) saw sequential improvement (+134bps QoQ) with moderation in price vs. cost gap. Benefit of lower staff cost (down 8.8% YoY) was entirely offset by higher A&P (+10.7% YoY) and other expenses (+5.1% YoY) resulting into EBITDA decline of 1.7% YoY to INR 37.3bn (c.3% beat vs. our est.) with margin compression of 90bps to 23.2% (better vs. our est. of 22.4%). Adjusted PAT declined 4.3% YoY to INR 24.8bn due to higher finance cost and lower other income (lower cash balance due to Minimalist acquisition/dividend payout).

* Beauty & wellbeing outperforms; Home care and Personal care disappoints: 1) Home care's sales performance was weak (down 1% YoY) led by moderation in UVG (mid single digit vs. high single digit in 1Q) and impact of price cuts taken in previous quarters. Performance in detergent bars/powders appears weaker considering strong growth in dishwash & liquids portfolio. 2) Beauty & wellbeing delivered USG of 5% YoY (ex-Minimalist) led by high-singledigit growth in skin care & colour cosmetics (led by 6 big bets in beauty & winter loading), robust growth in health & wellbeing (Oziva delivered triple-digit growth) was partially offset by GST transition led decline in hair care portfolio. 3) Personal care – 90% of the portfolio was impacted by GST rationalisation which led to high-single digit decline in UVG and flat USG on YoY basis despite soft base. Premium soaps grew in double digit, indicative of sharp decline in mass end soaps (Lifebuoy which remains a WIP). Oral care saw marginal decline YoY (better vs. Colgate’s sales decline of 6.3%). Close up delivered low-single digit growth. 4) Foods' USG grew 3% YoY (low-single digit UVG) – as double-digit growth in beverages was offset by price cut in nutrition & GST transition impact in packaged foods.

* Standalone performance: Standalone sales remained flat YoY at INR 154.2bn due to weak operating environment (prolonged monsoon and GST-led disruption). Gross margins contracted by c.60bps to 49.8%. Savings in staff cost (down 11.5% yoy) was entirely offset by higher A&P spend (4.3% yoy) and other overheads (+2.3% YoY). Resultant EBITDA margin contracted by 70bps to 23.1%. EBITDA and Adjusted PAT declined by 2%/5% respectively.

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