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Miss on volume; core portfolio performs well

* Hindustan Unilever’s (HUVR) 2QFY25 revenue was up 2% at INR157.3b (in line), with underlying growth of 3%. Volume growth of 3% was below our estimate of 5% (4% in 1QFY25). Demand trends remained stable, with moderate growth in urban areas and a stable recovery in rural regions.

* Home Care maintained high-single-digit volume growth and 8% revenue growth, led by both Fabric Wash and Household Care. Beauty & Wellbeing segment clocked mid-single digit volume growth, with underlying growth of 7% (reported 2%). Hair Care portfolio reported high single-digit volume growth and premium portfolio clocked strong double-digit growth.

* Personal Care posted low single-digit volume growth with a 5% decline in revenue. Pricing action in skin cleansing is hurting growth. Oral Care grew in high single digits. Food & Refreshment (F&R) posted a low single-digit volume decline with a 2% fall in revenue. Tea business is affected by persistently high inflation (25% YoY) in the category. A modest price hike was taken in 2Q, and an additional hike is expected in 3Q. Nutrition drinks saw a weak show.

* Gross margin contracted by 140bp YoY to 51.6% (miss) due to rising commodity prices. HUVR cut A&P spending by 14% YoY, leading to a lower contraction in EBITDA margin by 50bp to 23.8% (in line).

* The company focuses on volume-led growth through various initiatives for strengthening its core portfolio, expanding TAM, relevant for all channels, etc. Core portfolio (Home Care and Beauty Wellbeing with 55-60% revenue revenue) clocked 7-8% underlying growth in 2Q (largely volume-led). Thereby, along with macro improvements, HUVR can see volume acceleration in the ensuing quarters. Besides, the company is expected to take a price hike in low single digits (to offset inflation), which will also support revenue growth.

* Despite weakness in overall consumption, we believe HUVR can still see an upward growth trajectory. Rural is still performing well, and HUVR has relatively higher saliency from rural. We reiterate BUY rating with a TP of INR3,200 (60x on Sep’26E EPS).

In-line sales; miss on volume growth

* Reported net sales grew 2% YoY to INR157.3b (est. INR157.6b), with underlying volume growth of 3% YoY. EBITDA was flat YoY at INR37.9b (est. INR37.8b), PBT declined 1% YoY to INR35.6b (est. INR36.1b), and PAT (bei) was down 2% YoY at INR26.0b (est. INR26.9b).

* Segmental performance:

* Home Care (36% of total sales) revenue rose 8.0% YoY to INR57.3b and margin expanded 30bp YoY to 19.4%.

* Beauty and Wellbeing revenue (21% of total sales) grew 2.5% YoY to INR34.2b and margin contracted 70bp YoY to 32.8%.

* Personal Care revenue (15% of total sales) was down 4.9% YoY at 24.1b and margin contracted 140bp YoY to 16.9%.

* F&R sales (24% of total sales) declined 1.2% YoY to INR38.0b and margin contracted 60bp YoY to 18.1%.

* Gross margin contracted 140bp YoY to 51.6% (est. 52.5%) on rising commodity prices. Employee and other expenses rose 7% each, while ad-spends declined 14% YoY. EBITDA margin contracted by 50bp YoY to 23.8%. (est. 23.6%).

* A one-off indirect tax impact in Sep’23 was included in the reported sales for the quarter. Excluding this effect, intrinsic sales and APAT growth stood at 3% and 2%, respectively

* In 1HFY25, net revenue/EBITDA grew by 2%/1%, while APAT was flat YoY. In 2HFY25, we expect net revenue/EBITDA/APAT will grow by 6%/8%/9%.

* The board has declared an interim dividend of INR19 per share and a special dividend of INR10 per share.

Management conference call highlights

* Demand remained steady, with rural continuing to grow well, whereas urban demand seeing weakness. HUVR is focusing on its own initiatives to drive volume-led growth.

* The company has outlined four key initiatives to position itself as an outperformer: 1) strengthen core brands through superior offerings, 2) drive premiumization, 3) reshape the portfolio toward high-growth categories, and 4) lead in emerging channels of the future.

* The trends of upgrade and premiumization remain evident in rural markets, and the company expects this momentum to continue moving forward.

* HUVR has announced the separation of its Ice Cream business to focus on its core operations. The mode of separation will be decided by year end.

* There is volatility in the commodity prices. Crude oil, soda ash and skimmed milk powder prices declined by 10%, 5%, and 10%, respectively, while palm oil and tea prices increased by 10% and 25%, respectively.

Valuation and view

* We cut our EPS estimates by 2% for FY25 and FY26 each as we moderate our growth assumptions amid RM cost pressure.

* HUVR’s wide product basket and presence across price segments should help the company achieve a steady growth recovery.

* Under the new leadership of Mr. Rohit Jawa, HUVR is expected to take corrective actions to address the white space, particularly in BPC and F&R. The company commands strong leadership in Home Care, which can be capitalized during improving macros.

* We reiterate our BUY rating with a TP of INR3,200, based on 60x Sep’26E EPS, close to last five-year average P/E.

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