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Volume recovering gradually; Pricing turns positive in 2H

Hindustan Unilever’s (HUVR) 2QFY25 performance was in-line with our estimate. Underlying Volume Growth (UVG) came in slightly below at 3% (5-year CAGR at ~2.8%) versus our est. of 4%. UVG decline in Soaps and Tea was offset by high-single digit UVG in Fabric Wash & Household Care. Tea category growth was impacted by downgradations while Soaps will take couple of quarters to recover from the recent price actions at the mass end. We continue to expect overall UVG to be better in 2H but it is more gradual than expected. This along with low-single digit pricing (anniversarization of price cuts + additional calibrated price hikes in soaps & tea) and no major improvement in EBITDA margins from current levels of 23-24% leads to just 5.7% earnings growth in FY25. We roll-forward our target price to FY’27E EPS, giving us a target price (TP) of Rs2,845. Maintain Neutral.

Result Highlights

* Headline performance: HUVR’s standalone turnover (including other operating income-OOI) for 2QFY25 grew by 1.5% YoY to Rs155bn (vs our est. Rs156.5bn). EBITDA de-grew by 1.3% YoY to Rs36.5bn (vs our est. Rs36bn). Recurring PAT (PAT bei) de-grew by 2.1% YoY to Rs26.1bn. Reported PAT de-grew by 3.9% YoY to Rs26.1bn. ? UVG for 2QFY25 came at 3% YoY, below our est. of 4%.

* Margins (Please note, our margins calculated with revenue (Sales+OOI) in denominator and not sales.): Reported gross margin came in at 51%, down ~170bps YoY (-40bps QoQ). While EBITDA margin was down 70bps YoY to 23.5%. A&SP was down 180bps YoY to 9.4% (down 14.9% on absolute basis) while other expenses was up 50bps YoY along with 30bps YoY increase in staff costs.

* 1HFY25 performance: Revenue, EBITDA and APAT grew by 1.4%, 0.5% and 0.3% YoY, respectively. Gross margin is flat YoY at 51.2% while EBITDA margin is down 20bps YoY to 23.5%.

Key near-term outlook: (1) Urban growth has trended down; rural growing gradually but has been ahead of urban. Growth in big cities trending down. (2) Crude Oil, Palm Oil and Tea seeing inflation. Company taking calibrated price increases.

View & Valuation

We expect HUL to deliver ~7% revenue CAGR over FY24-27E with ~5% volume CAGR and ~2% pricing. With strong gross margin recovery in FY24, we believe EBITDA margin will now see a modest improvement of ~60bps over FY24-27E, driven largely led by mix improvement. We thus estimate a subdued 8.4% earnings CAGR over the same period. In the very near term, we continue to expect overall UVG to be better in 2H but it is more gradual than expected. This along with low-single digit pricing (anniversarization of price cuts + additional calibrated price hikes in soaps & tea) and no major improvement in EBITDA margins from current levels of 23-24% leads to just 5.7% earnings growth in FY25. HUVR is now currently trading at ~59x/53x/49x on our FY25E/FY26E/FY27E EPS as we build revenue/EBITDA/APAT CAGR of 7%/7.8%/8.4% over FY24-27E. We roll-forward our target price to FY’27E EPS, giving us a target price (TP) of Rs2,845. Maintain Neutral.

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