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Demand resilient, valuations factor in headwinds

We increase our FY27/FY28/FY29 EPS estimates by 3.1%/3.1%/4.4% and rating to Buy driven by (1) sustained demand outlook in a challenging scenario, (2) HUL retaining its EBIDTA margin guidance band of 22–24% despite the inflationary environment, and (3) likely structural tailwind from premiumization across segments which not only will provide higher margins, but higher topline growth also.

HUL continues to face inflationary pressures in Home Care, Personal Care and Beverages while Beauty and Nutrition businesses have seen resilient margins. Strong volume growth in Detergents and success of Rs99 pack of surf excel easy wash and beauty segment in reassuring. We expect more price hikes given inflationary scenario in both crude and Agri linked commodities. We believe the playbook of HUL gaining share from unorganized and regional looks likely in such a scenario. HUL’s focus on emerging channels, premium products, innovation and WINI will provide superior growth than past few years.

We expect double digit bottom-line growth in FY28/29 as HUL will move towards higher end of its margin guidance band of 22-24% after a correction in FY27. We estimate an EPS CAGR of 11.7% over FY27–29. We believe valuations at 30.8xFY29 and 2.5% dividend yield leave little room for incremental de-rating. We assign a PE-based target price of Rs2,268 (40xSept28 EPS versus Rs2,326 earlier based on DCF) and upgrade our rating to BUY.

Consolidated Volumes grew 7%, Gross margins declined 415bps YoY

Revenues grew by 14.9% YoY to Rs175.4bn (PLe:Rs169.09bn). Gross margins contracted by 415bps YoY to 46.4% (PLe:49%). EBITDA grew by 8.8% YoY to Rs39.4bn (PLe:Rs38.38bn). A&P Expenses declined by 12.5% YoY to Rs13.1bn, 230bps YoY. Adj PAT grew by 10.7% YoY to Rs28.2bn (PLe:Rs26.96bn).

Home Care grew by 21.4% YoY; EBIT grew by 1.9% YoY; while margins contracted by 298bps YoY to 15.5%. Fabric wash and Household care delivered double digit growth. During 2Q, success of Rs99 pack of surf excel easy wash, liquids portfolio enabled steady volume growth strengthened market leadership.

Personal Care grew by 7.9% YoY; EBIT declined by 9% YoY; while margins contracted by 315bps YoY to 16.9%. Skin cleansing recorded double digit sales growth driven focused market development in Pears and Dove bars. Oral care grew by low single digit as premium innovations continue to see healthy traction.

Beauty & Wellbeing grew by 16.1% YoY; EBIT grew by 20.5% YoY; while margins expanded by 114bps YoY to 31.6%. Premium hair care continues to outperform. Skin care and Cosmetics delivered double digit volume led growth. Premium skin care sustained its growth trajectory with double digit growth in organized trade. Oziva witnessed another soft quarter.

Food & Refreshment grew by 8.5% YoY; EBIT grew by 15.7% YoY; while margins expanded by 130bps YoY to 21.7%. Coffee delivered high single digit growth, volume led. Mass tea witnessed subdued quarter however premium tea continue to scale well. Lifestyle nutrition continued double digit growth trajectory with Horlicks biscuits and RTD format saw healthy traction. Packaged foods grew by double digits.

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