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Journey toward sustainable growth

Hindustan Unilever’s (HUVR) FY24 annual report provides insights about its key focus areas to build upon its sustainable growth model. The company remains committed to distribution expansion (reached 9mn retail touch-points with 3mn direct-reach), digital initiatives (D2C business spans 10 brand websites covering over 19k pin codes in India), ramping up the alternate channel (ecommerce + MT combined at ~30% vs. 20% in FY20) and Shikhar app (B2B; now reaches 1.3m retail outlets). Despite macro challenges that have affected its operational performance in the last two-years, HUVR continues to focus on capital efficiency. HUVR has received tax refund of INR31.5b related to FY21 and FY22. Its cash flow from operation adjusted to tax rose by 23% YoY to INR123b with a two-year CAGR of 17%, and FCF increased by 21% YoY to INR109b with two- year CAGR of 17% led by working capital efficiency. We continue to believe that in a steady macro environment, HUVR will boost its volume performance in FY25/FY26. We maintain our BUY rating with a TP of INR2,900 (55x P/E FY26).

Moderate performance in FY24 due to subdued demand in rural markets

HUVR delivered a moderate performance in FY24 as revenue grew 2% to INR619b due to a challenging business environment. The company experienced gradual deflation in commodity prices across its portfolio after an extended period of high inflation. However, cumulative inflation remained elevated. Additionally, uneven rainfall led to subdued agricultural output, affecting rural demand. HUVR delivered underlying volume growth of 2% in FY24. Gross margin improved 430bp to 51.9%, which HUVR reinvested in A&P for brand building (up 32% YoY to 10.5%). As a result, EBITDA margin inched up 30bp to 23.7% (23.4% in FY23). PAT grew 1% YoY to INR103b in FY24. The dividend payout ratio stood at 96%, compared to 90% in FY23. HUVR generated ROE of 20% and ROCE of 28% in FY24. The company achieved efficient net working capital days of (-17) in FY24.

Business segment highlights

* Beauty and Personal Care (BPC) portfolio saw 2% growth, driven by volume growth as HUVR passed on cost savings to consumers through price cuts and promotions. Premium segments in Hair Care and Skin Care led growth, while mass segments showed a slower volume recovery. Starting 1st Apr’24, HUVR has split its BPC business into Beauty & Wellbeing and Personal Care for enhanced focus.

* Home Care business grew by 3% despite a high base in FY23, with mid-single digit volume growth offset by negative pricing trends. Premium products like washing powders and liquids maintained strong growth due to stable market development efforts.

* Foods & Refreshment segment reported 4% underlying sales growth. Nutrition Drinks (Horlicks & Boost) and Tea gained significant market share, while Food Solutions saw robust high double-digit growth. Ice Cream faced weatherrelated challenges but still achieved strong overall growth. Coffee led category growth with double-digit increases, driven by strategic pricing initiatives.

Maintain market leadership in 85% of its business

HUVR has sustained market leadership in more than 85% of its portfolio, driven by the top 19 brands, each generating over INR10b in annual sales. Together, these brands contribute significantly to HUVR's turnover, accounting for more than 80% of its total sales. The company's strategy includes continuous innovation with new product variants and upgrades aimed at enhancing consumer experiences. Particularly in fabric care and dish wash, HUVR is focusing on liquid formulations to meet evolving consumer preferences for convenience and efficacy. This relentless focus on innovation and consumer satisfaction underscores HUVR's commitment to maintaining and expanding its market leadership in the industry.

Driving innovation and efficiency

HUVR continued to focus on leveraging its technological capabilities, which help to expedite product launches through the Agile Innovation Hub and integrating supply chain processes for faster decision-making with the 'Supply Chain Nerve Center.' The company also advances digital demand generation and fulfillment using nano factories, machine learning, digital marketing, D2C channels, and automated warehouses to stay competitive. HUVR is moving from the traditional linear value chain to an ecosystem across consumers, customers, and operations, with the help of data, technology and analytics. About 30% of its digital demand is generated digitally via its future-ready platforms of Shikhar app, e-commerce and D2C websites.

Adapting to the changing distribution landscape

HUVR's B2B app, Shikhar, now reaches 1.3m retail outlets, while its D2C business spans 10 brand websites covering over 19k pin codes in India. Shikhar has partnered with ONDC to help retailers list on the platform (currently testing this in selected stores). With a diverse customer base, including traditional distributors, digital platforms and neighborhood retailers, HUVR products are available in over 9m retail outlets through 3,500 distributors. The company is expanding beyond traditional channels to embrace ecommerce, B2B and modern trade, focusing on omni-channel strategies and partnerships.

Valuation and view

* HUVR has consistently reinforced the fundamental factors that have contributed to its success in India. They include: (a) embracing technology to gather valuable data and enable informed decision-making, (b) adopting the ‘Winning in Many Indias’ (WiMI) strategy that emphasizes decentralization and tailored approaches, (c) identifying emerging trends and proactively investing in them, (d) reinvesting cost savings into the business, and (e) showcasing exceptional execution capabilities that have led to consistent earnings growth.

* We also believe that HUVR is the best prepared among peers in terms of technology and e-commerce strategy to deal with potentially significant disruptions going forward.

* 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.

* We reiterate our BUY rating with a TP of INR2,900, based on 55x FY26E EPS

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