Buy Hindustan Unilever Ltd For Target Rs. 3250 By Motilal Oswal Financial Services Ltd
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Demand trends consistent with 1QFY25
We spoke with HUVR management about the 2QFY25 update. Following are the key highlights:
* Industry demand: According to Nielsen data up to Jul’24, demand trends are consistent with the previous quarter, and HUVR has also confirmed that Aug’24 demand trends were also not too different. Rural growth has been outpacing urban growth (although three-year CAGR is higher in urban markets). The recovery in the mass segment has been slower than anticipated, mainly due to high food inflation during the quarter. The pickup in discretionary products was also slow.
* 2QFY25 for HUVR: In the base quarter (2QFY24), a one-off benefit from the favorable resolution of an indirect tax litigation contributed to an additional 1% sales increase, an 80bp improvement in EBITDA margin, and a ~5% increase in PAT. Thereby, it will have some impact on reported performance. The price cut impact on revenue will be milder than it was in 1QFY25 (2.5% impact), but due to the base quarter one-off tax adjustment, the price cut impact would look higher. The company’s own initiatives will support volume growth.
* Beverages: The tea segment has been facing a downtrend amid inflationary pressures; however, the company has not raised prices.
* Nutrition Drinks (Horlicks & Boost): The segment has seen improvement in the category after it was impacted by heat waves in 1QFY25.
* Soaps: HUVR has received positive feedback about the relaunch of Lux and Lifebuoy.
* Product Innovation: The company continues to prioritize reshaping its portfolio and expanding its existing brands. New product development is in focus in the overall growth strategy.
* Sustaining margins: Intrinsic EBITDA margin is expected to remain flat YoY (last year EBITDA margin was 24.3% with 80bp gain from a one-off tax benefit). Thereby, intrinsic EBITDA margin was ~23.5% in 2QFY24.
Valuation and View
* HUVR’s wide product basket and presence across price segments should help the company achieve a steady recovery in growth.
* 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 estimate EPS growth of 10%/12% for FY25/FY26. We reiterate our BUY rating with a TP of INR3,250, based on 60x Jun’26E EPS.
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SEBI Registration number is INH000000412
