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Expanding growth levers; HUVR aspiring for double-digit EPS growth

* Hindustan Unilever’s (HUVR) FY25 annual report highlights its key focus on portfolio transformation, driven by increased innovation across high-growth segments and investments in future-ready channels to capture the growing base of affluent consumers. The company remains committed to expanding its distribution network (reached 9m retail touchpoints, with 3m direct reach). E-commerce contributed 7-8% to total sales in FY25, with Quick Commerce accounting for ~2%. Organized trade remained margin accretive due to a higher mix of the Future Core and Market Makers portfolios and the Shikhar app (B2B; now reaches 1.4m retail outlets). Despite macro challenges that have affected operational performance over the past two years, HUVR continues to prioritize capital efficiency, maintaining a healthy cash conversion ratio and driving long-term sustainable growth, with a focus on delivering double-digit EPS growth.

* The company has recently (4Q concall) downgraded EBITDA margin guidance to 22- 23% vs. earlier guidance of 23-24%, reflecting plans to accelerate marketing/promotion budgets. We expect the cost impact to be front-ended, while the recovery in volumes will likely be gradual. We continue to believe that in a steady macro environment, HUVR will boost its volume performance in FY26/FY27. We reiterate our BUY rating with a TP of INR2,850 (55x P/E FY27).

Muted performance in FY25 as consumption sentiments remain weak

In FY25, HUVR faced a challenging operating environment marked by subdued urban demand, fluctuating commodity prices, and weak seasonal demand. The company posted 2% YoY revenue growth, supported by 2% volume growth, reflecting its ability to manage short-term volatility while sustaining investments in long-term growth. Gross margin contracted 40bp to 51.6% due to high input cost volatility, leading to a 20bp contraction in EBITDA margin to 23.5%. PAT grew 1% YoY to INR104b in FY25. The dividend payout ratio stood at 97%, compared to 96% in FY24. Including the special dividend of INR10 per share, the FY25 dividend payout ratio stood at 120%. The company achieved efficient net working capital days of (-19 days) in FY25. Management remains optimistic and sees promising opportunities ahead. Guided by its new strategy, ‘ASPIRE: Unlocking a Billion Aspirations’, the company has advanced its portfolio transformation by driving innovation in high-growth segments, increasing investments in future-ready channels, and pursuing strategic mergers and acquisitions.

Business segment highlights

* In FY25, the Home Care business (36% revenue mix) posted 5% sales growth driven by high single-digit volume growth. As commodity prices softened, the company passed the benefits on to consumers through price cuts and promotions, resulting in negative pricing for the year. Both the Fabric Wash and Household Care segments recorded strong volume growth, and the premium portfolio continued to deliver robust growth.

* The Beauty & Wellbeing (B&W) segment (21% mix) posted 2% revenue growth led by healthy volume gains. Growth was broad-based across the Core, Future Core, and Market Makers portfolios. Skin Care was impacted by weaker mass skincare market performance and delayed winter, but the premium portfolio continued its strong growth trajectory, driven by portfolio transformation.

* Personal Care sales (15% mix) declined 3% in FY25. Within this category, Skin Cleansing witnessed commodity fluctuations as palm oil transitioned from deflationary in the first half of the year to inflationary in the latter half. Oral Care posted mid-single-digit growth driven by pricing. Bodywash continued to deliver strong double-digit growth, supported by technology-based innovations and market development initiatives. Strategic actions taken during the year contributed to positive momentum in the Non-hygiene Skin Cleansing segment in the latter part of FY25.

* The Foods & Refreshment (24% mix) business remained flat in FY25 as HUVR continued to premiumize and pivot its Foods portfolio toward high-growth segments to deliver greater consumer value. The Tea segment retained market leadership, while the Coffee segment posted double-digit growth driven by pricing. Packaged Foods, which includes categories such as Condiments, International Cuisines, and Food Solutions, delivered robust growth. The Ice Cream segment also recorded strong, volume growth, driven by innovation.

Maintains market leadership in over 85% of business

HUVR has sustained market leadership in over 85% of its portfolio, driven by its top 19 brands, each generating over INR10b in annual sales. Collectively, these brands significantly contribute to HUVR's turnover, accounting for over 80% of its total sales. HUVR aims to remain relevant to India’s large consumption theme, which comprises: 1) rising income prosperity, 2) a young population with a median age under 32 years, and 3) increasing digital and social connectivity. This relentless focus on innovation and consumer satisfaction underscores HUVR's commitment to maintaining and expanding its industry leadership.

Driving innovation and efficiency

HUVR continues to focus on leveraging its technological capabilities to accelerate product launches through the Agile Innovation Hub and to integrate supply chain processes through the Supply Chain Nerve Center, which recommends actions based on real-time alerts and predictions. HUVR has developed Nakshatra to create a future-fit manufacturing network aimed at enhancing efficiency, agility, and sustainability. The initiative is focused on improving operational responsiveness, reducing costs, and adapting to dynamic market demands. The company is also advancing digital demand generation and fulfillment through nano factories, machine learning, digital marketing, D2C channels, and automated warehouses to stay competitive. Overall, HUVR is moving from a traditional linear value chain to a connected ecosystem spanning consumers, customers, and operations, enabled by data, technology, and analytics.

Adapting to the changing distribution landscape

HUVR's B2B app, Shikhar, now reaches 1.4m retail outlets and has a 70% monthly active user rate. Shikhar has partnered with ONDC to help retailers list their products and sell their entire range online. With a diverse customer base—including traditional distributors, digital platforms, and neighborhood retailers—HUVR’s products are available in over 9m retail outlets, supported by 3,500 distributors across more than 2,000 towns and channel partners. The company is expanding beyond traditional channels to embrace e-commerce, B2B, and modern trade, with a strong focus on omnichannel strategies and partnerships. In FY25, e-commerce contributed 7-8% to total sales, with quick commerce accounting for ~2%. Organized trade remained margin accretive due to a higher mix of the Future Core and Market Maker portfolio. During the year, the company established a dedicated beauty premium retail organization (PRO) to drive distribution and demand for its premium beauty products. Currently, HUVR directly services stores that collectively account for over 69% of the value of its relevant categories.

Valuation and view

* The company continues to place the building blocks for future growth, staying ahead of its peers.

* HUVR has also continued to strengthen the key drivers of its success in India over the last decade, including a) pioneering the use of technology to generate data and facilitate decision-making; b) the Winning in Many Indias (WiMI) strategy, focused on decentralization and localized strategies; c) recognizing trends and investing in them early on; d) funneling cost savings back into the business; and e) strong execution capabilities that have led to positive earnings momentum.

* HUVR has continued to strengthen its brand, distribution network, and quality of personnel, thereby staying ahead of its peers. In addition, through its analytics and R&D initiatives in recent years (much ahead of its peers), HUVR is ensuring it remains resilient in a dynamically changing environment.

* Under the new leadership of Mr. Rohit Jawa, HUVR has initiated corrective actions to address the white space, particularly in B&W and Foods. The company commands strong leadership in Home Care, which can be capitalized as macro conditions improve.

* The company focuses on volume-led growth through various initiatives to strengthen its core portfolio, expand TAM, drive premiumization, and transform its B&W and Foods portfolios. It is also exploring new growth levers through inorganic opportunities.

* The company has recently (4Q concall) downgraded EBITDA margin guidance to 22-23% vs. earlier guidance of 23-24% to accelerate investments in marketing/promotion/etc. We expect cost impact to be front-ended, while the recovery in volumes will likely be gradual. We continue to believe that in a steady macro environment, HUVR will boost its volume performance in FY26/FY27. We reiterate our BUY rating with a TP of INR2,850 (55x P/E FY27).

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