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Focus on accelerating growth at the cost of near term margins

HUL’s UVG was tad better; however, operational performance was inline with our muted forecasts, due to weaker GMs. On segmental basis, Home Care saw moderation in growth, F&R declined (Horlicks led), B&W was mixed bag (mass Skin Care/Colour Cosmetics seeing decline) while Personal Care sales improved led by pricing (in Soaps/Oral Care). While internals were not exciting, what surprised was the outlook. Mgmt. prognosis about underlying macro is positive (vs. past quarters). With core revamped (GAL/Lifebuoy), portfolio transformation towards future core categories (salience up c.200bps in FY25) on track, focus is now clearly on accelerating growth (1HFY26 to be better vs. 2HFY25). This would entail higher investments across lines resulting in lower EBITDA margins (22-23%, c.100bps lower vs. earlier guidance) in near term (next 2-3 quarters). What is comforting is that it is not a permanent reset in profitability - as growth comes back, leverage benefit should kick in & drive margin improvement in the later part of the year. While this would translate to muted earnings growth in FY26E, we like the intent to choose growth at the cost of short-term margin. Further, the medium term guidance of modest margin expansion/double-digit EPS growth remains intact. We are building acceleration in sales growth over FY26/27E; however, factoring in lower margins in near term has led to earnings cut of c.4-5% for FY26/27E. While valuations below LT avg. provide some cushion to downside, rerating will be contingent on pace of acceleration in volume growth in the coming quarters. We roll forward to June’27E EPS & retain BUY with revised TP of INR 2,555 (from INR 2,485).

*  UVG sees improvement; GM compression offset by tighter cost control: Reported sales grew 2% (USG:3%) to INR 150bn entirely led by volumes (2% vs. est. flat) as pricing remained flat – price hikes taken in Soaps/Beverages was offset by price cuts in home care portfolio. Weak GM delivery – down 156bps yoy to 49.8% (vs. est. 50.4%) due to high RM costs and lack of commensurate price hikes. Staff cost/other expenses grew c.2-3%, while A&P spends were tightly controlled (c. -8% yoy) resulting into EBITDA growth of 0.9% to INR 34.6 bn and margin compression of 27bps to 23.1% (inline). Adj. PAT grew 4.8% to INR 25.1bn due to lower interest cost and benefit of prior period tax adjustment.

*  Segmental performance: 1) Home Care USG moderated to 3% (from c.6%-8% in the last 2 quarters) as mid-single digit UVG was partially offset by price reductions undertaken to pass on deflationary commodity price benefit to consumers. 2) Beauty & Wellbeing saw some recovery – USG of 3%, although growth was led by Hair Care while Skin Care & Colour Cosmetics declined in low single digits to due to weakness in mass Skin Care. 3) Personal Care saw USG of 3% largely driven by pricing in Soaps/Oral Care as volumes declined in low-single-digit. Lifebuoy is being re launched to address decline in Hygiene while Body wash continued its strong double-digit growth. Oral Care (Closeup) delivered pricing led low-single digit growth. 4) Foods USG was down 1% with mid-single-digit volume decline. Tea delivered low-single-digit growth (pricing led, lower vs. double-digit growth in TCPL’s domestic tea) while Nutrition Drinks’ sales declined impacted by category headwinds. Packaged Foods delivered mid-single digit growth led by strong performance in future core and market makers segments.

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