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Volume muted; rural recovery essential

* HMN reported 6.3% sales growth in 2QFY24 (broadly in line with our estimates), attributed to factors like poor monsoons, food inflation, and subdued demand in rural markets. Domestic business growth at 4% YoY led by 2% volume growth, which was mainly driven by channels catering to urban markets such as Modern Trade (MT) and E-commerce.

* The Navratna and Dermi Cool reported robust double-digit growth, while single-digit fall see in BoroPlus/Kesh King/ Male grooming due to low demand from price-sensitive consumers.

* The management has guided for a 200-250bp expansion in EBITDA margin and high- single digit sales growth in FY24.

* We retain our BUY rating on HMN, considering a gradual rural revival (over 50% of sales), inexpensive valuations at 28xFY25E EPS, improving revenue performance, rural distribution expansion, and increased ad spending.

Sales in line; profitability below estimates

* Consolidated net sales grew 6.3% YoY to INR8,649m (est. INR8,845m). EBITDA grew 19.6% YoY to INR2,337m (est. INR2,468m). PBT increased by 4.1% YoY to INR2,199m (est. INR2,408m). Adjusted PAT before amortization remained flat YoY at INR2,034m (est. INR2,206m).

* Domestic business grew ~2% YoY.

* Gross margin expanded by 350bp YoY/470bp QoQ to 70.1%. (est. 67.2%). EBITDA margin expanded by 300bp YoY/400 bp QoQ to 27.0% (est. 27.9%) due to other expenses (down -30bp), employee costs (up 30bp YoY) and adspends (up 50bp YoY).

* Absolute ad spending increased by 9.1% YoY to INR1,544m.

* International sales grew 12% YoY (16% growth in constant currency), driven by SAARC, GCC and CIS.

* Revenue performance of domestic segments YoY in 2QFY24: Navratna (+12%), Pain Management (+1), BoroPlus (-4%), Kesh King (-5%), Male Grooming (-7), Healthcare (+4%).

* The board has declared the interim dividend of INR 4.

Highlights from the management commentary

* The market is witnessing a slowdown. A rural recovery is expected to be driven by the winter season and elections. In 2QFY24, E-commerce surged 50% and MT grew 17-18%, with an 13% and 11% contribution, respectively, to total sales.

* Margin in MT and E-commerce was lower than that in General Trade (GT), presenting an opportunity for improvement.

* The company has launched ten digital first products on Zanducare portal during the quarter to leverage the opportunity in the healthcare portfolio

* The company acquires a 26% stake in Axiom Ayurveda to enter the juice category. It is seeing competition in the cool oil segment from Dabur.

* Promoters' stake declined to 15% following the majority stake disinvestment in AMRI hospital.

Valuation and view

* There is no material change to our FY24/FY25 EPS estimates.

* HMN’s sales CAGR of 8.7% over FY20-23 was far better than the 3% sales CAGR over FY16-20. We believe future growth will be driven by investments in new brands, double digit growth CAGR in international market, rural distribution expansion and recovery in the rural market (over 50% sales). There is also margin improvement scope in the E-commerce and MT channel.

* Valuations are inexpensive at 19.5x FY25 EPS; hence we reiterate our BUY rating with a TP of INR640 (based on 28x FY25 P/E multiple).

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SEBI Registration number is INH000000412