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On a like-to-like basis, HUL’s Sep-Q earnings were inline with our expectations though with a somewhat different construct (detailed below). Volume growth of 2% is a further step-down vs earlier levels and rural recovery remains gradual with market volumes still lower vs twoyear ago level. Gross margin progression was much better, but flowthrough to EBITDA was curtailed by higher A&P (+65% yoy) - management expects intensity of spends to sustain, given the step-up seen in competitive activities. The hope for a gradual volume recovery in rural remains, given reversal of inflation, higher infrastructure spends by government, and expectation of tailwinds from a good festive season. On the other hand, the consequence of a weaker monsoon and the volatility in crude-oil prices are the key watch-outs at this stage. We expect HUL’s stock to be under some pressure on the back of the weak Sep-Q report, and absence of clear volume-trigger at this juncture.

* Operationally inline performance; volume trajectory was weaker than expected, though: HUL reported 3.5%, 9.4% and 12% growth in sales, EBITDA and pre-exceptional net profit to INR150.3bn, INR36.9bn and INR26.7bn. Ex one-off benefit (favourable resolution of past indirect tax litigation) in BPC revenue, overall sales, EBITDA and bottoline growth were 3%, 5% and 7% respectively - exactly inline with our forecasts though with a slightly different construct: 1) On revenue, volume growth was softer at 2% (vs our expectation of 4%) but was made-up through better pricing which was still tad positive vs JMFe -1%. 2) On profitability front, gross margin build-back was much better (GPM +650bps like-to-like) but a very significant portion was used to grow A&P spends (+65% yoy and >400bps higher as a % of sales).

*Volumes grew better in Home-care, BPC but pulled down by decline in F&R: Segmentally: 1) Home-care growth moderated further to 3.3%. Volumes grew in mid-single digit but price reductions led to lower value growth. A&P spends were stepped up given resurgence of smaller and regional players in the current deflationary environment. Interestingly, small Detergents Bars players are growing at 6x the rate of larger players. 2) BPC growth remained low at just 4.5% (sub-4% excluding one-off) - entirely volumedriven. Skin and Cosmetics grew double digit but Soaps declined due to price-cuts. Haircare grew in high single-digit and Oral-care growth was in mid single-digit. Management highlighted that interventions are being taken to transform skin-care and deal with ontrend demand spaces. 3) F&R remained disappointing. HFD volumes continued to decline despite the focus on lower-priced packs. High milk prices continued to have its impact. Coffee volumes were also impacted due to high commodity inflation. Tea growth was modest as well as category remained impacted by consumers downgrading.

*Positive surprise on gross margin almost entirely offset by higher SG&A expenses: On a like-to-like basis, HUL’s GPM expanded c.650bps yoy, c.230bps qoq to 51.5% (vs JMFe 49.5%) helped by reduction in costs of key inputs. Management cited volatile crude-oil prices as a watch-out, though. A&P spends rose 65% - much higher vs our forecast - a function of high competitive intensity as visible through the uptick in media intensity (GRP +33% yoy) and continued aggression of smaller players in select categories. Other Expenses also grew at a much higher pace (+19% including c.4% due to higher royalty to Unilever) – these had a c.170bps impact on margin. 

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