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In-line performance; expects better delivery in FY25

* Hindustan Unilever’s (HUVR) performance in 4QFY24 was in line with our estimates. Net revenue was up 1% YoY with 2% volume growth. Home care maintained mid-single-digit volume growth. Beauty & Personal Care (BPC) and Food & Refreshment (F&R) posted flat volume growth YoY. Demand drivers were steady in 2HFY24. Premium portfolio growth across categories was healthy, while the mass portfolio remained weak.

* Home care growth and margin (up 130bp QoQ) beat expectations. BPC was a miss, largely due to a volume contraction in the soap portfolio (mass segment). The company has addressed the issue by fixing the pricing gap. Horlicks & Boost portfolio saw high single-digit growth, driven by volume and price, along with share gains.

* Gross margin expanded by 320bp YoY to 52.3% in 4Q, out of which 200bp was reinvested in A&P (up 23% YoY in 4Q; up 32% in FY24). The termination of GSK consignment sales impacted EBITDA margin by 60bp (impact starts in Q4FY24). EBITDA margin moderated by 25bp YoY to 23% (in line).

* In the transition phase of last 12 months, volume growth was weak and value growth was affected by price cuts. We expect a gradual recovery in volume growth in FY25, driven by own initiatives and gradual improvement in demand. The impact of price cuts will persist in 1HFY25, but the volume print should improve during this phase and the full revenue recovery will be visible in 2HFY25, as highlighted in our recent sector thematic report. Considering favorable risk-reward, we reiterate BUY rating on HUVR with a TP of INR2,900 (55x on FY26E EPS).

Steady demand trends; home care continues to shine

* HUVR reported 1% YoY growth in net sales at INR150.4b (est. INR150.8b). EBITDA was down 1% YoY at INR35.4b (est. INR35.4b). PBT was down 2% YoY at INR33.4b (est. INR33.5b), and PAT (bei) declined 2% YoY to INR25.0b (est. INR25.1b). Underlying volumes grew 2% YoY (est. 3%), largely maintaining the trend.

* Segmental performance: Home care (38% of total sales) revenue grew 1.3% YoY to INR57.1b (5-year CAGR: 10%). BPC (35%) revenue was down 2.5% YoY at INR51.3b (5-year CAGR: 3%). F&R business sales (25%) rose 3.1% YoY to INR39.1b (5-year CAGR: 15%). Home care maintained mid-single-digit volume growth, slightly better than expected. In BPC, B&W clocked 4% sales growth, while PC sales declined 10% (pricing led). Oral care clocked doubledigit sales growth, led by pricing and market share gain.

* Segmental EBIT: Home care margin expanded 40bp YoY to 19.5%, while Personal Care margin contracted 80bp YoY to 25.2%. Food & Refreshment margin expanded 100bp YoY to 18.9% during the quarter.

* Gross margin expanded 320bp YoY but declined 30bp QoQ to 52.3% (est. 50.6%). As a percentage of sales, an increase in ad spending (+200bp YoY to 10.6%), other expenses (+80bp YoY to 13%) and staff costs (+60bp YoY to 4.8%) resulted in a 30bp contraction in EBITDA margin to 23.2% (est. 23.1%).

* In FY24, HUVR’s net sales/EBITDA/adj. PAT grew 2.2%/3.6%/0.7% YoY.

Management conference call highlights

* The demand for FMCG products is expected to gradually increase. The forecast of above-normal monsoons and positive trends in macroeconomic indicators augur well for the industry. The RM basket remains within a range and is witnessing deflation.

* HUVR expects a slight deceleration in price growth in the near term if commodity prices stay stable. It expects price growth to level off in the medium term and expects prices to grow in the low single digits by the end of FY25.

* There will be a moderate pace of improvement in EBITDA margin in the near term, and it is expected to remain around 23-24%.

* Soap saw an increase in A&P spending, along with enhancements in product formulation. The decline in volume was primarily due to the mass segment. Lifebuoy, previously off the value equation, has been corrected and is showing some benefits. Improvement is expected in the next quarter.

* Contribution of distribution channels: 70% through GT, 20% through MT, 7% through e-commerce, and 3% through quick commerce. The distribution mode stood at 1.2x to 1.25x the levels of FY20. There was 50% growth in e-commerce in FY24.

Valuation and view

* There is no material change in our EPS estimates for FY25 and FY26. ? We believe that HUVR’s volume growth has bottomed out and expect a gradual volume recovery in FY25. HUVR’s wide product basket and presence across price segments should help the company achieve a steady growth recovery.

* There is scope for a turnaround in part of BPC and F&R; we will monitor the execution in these segments under the new CEO.

* The valuation at <45x FY26E EPS is reasonable given its last five-year average P/E of 60x on one-year forward earnings. We reiterate our BUY rating with a TP of INR2,900 based on 55x FY26E EPS.

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