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1Q in-line; Price run-up leads to rating downgrade

Hindustan Unilever’s (HUVR) 1QFY24 operating performance was in-line with our estimate. Underlying Volume Growth (UVG) came in slightly better at 4% (2-year CAGR at ~3.5%) versus our est. of 2.5%. Miss on Food & Refreshments (F&R) segment was offset by better growth in Home Care which saw strong UVG. Skin cleansing is seeing early green shoots in bars indicating positive results from recent actions (pricing, innovation, promotion). Management believes it has gained market share in its key segments of mass detergent, tea and skin care. While we expect UVG to improve through the course of the fiscal, flattish pricing (negative pricing in 1H offset by low single digit pricing in 2H) and no major improvement in EBITDA margins from current levels of 23-24% (even while RM remains benign) does not build into strong earnings growth for FY25. We roll-forward our target price to Sep’26E EPS, giving us a revised target price (TP) of Rs2,845. Recent run-up makes us downgrade our rating a notch to NEUTRAL.

Result Highlights

* Headline performance: 1QFY25 standalone turnover (including other operating income-OOI) for 1QFY25 grew by 1.3% YoY to Rs153.4bn (vs our est. Rs152.7bn). EBITDA grew by 2.4% YoY to Rs36.1bn (vs our est Rs35.7bn). Recurring PAT (PAT bei) grew by 2.9% YoY to Rs25.7bn. Reported PAT grew by 2.7% YoY to Rs25.4bn.

* UVG for 1QFY25 came at 4% YoY, above our est. of 2.5%.

* Margins (Please note, our margins calculated with revenue (Sales+OOI) in denominator and not sales.): Gross margin surprised us negatively and came in at 51.4%, up ~150bps YoY (-40bps QoQ). While EBITDA margin was up 30bps YoY to 23.5%. A&SP was up 90bps YoY to 10.7%, other expenses was up 70bps YoY while staff costs was down 40bps YoY.

Key near-term outlook: (1) FMCG and rural demand are gradually improving. (2) Commodity prices remain benign on a deflationary base. (3) Excluding the one-off indirect tax impact in base: Near zero pricing growth if commodity prices remain where they are & EBITDA margins to remain at current levels.

View & Valuation

We have made no change to our FY25E/FY26E earnings. We expect HUL to deliver 7.6% revenue CAGR over FY24-26E as volume is recovering gradually in the very nearterm and overall pricing remains negligible. With strong gross margin recovery in FY24, we believe EBITDA margin will now see a modest improvement of ~40bps over the next two years driven largely led by benign commodity inflation and mix improvement. In the very near term, while we expect UVG to improve through the year, flattish pricing (negative pricing in 1H offset by low single digit pricing in 2H) and no major improvement in EBITDA margins from current levels of 23-24% (even while RM remains benign), does not really offer levers for strong earnings growth. HUVR is now currently trading at ~58x/53x on our FY25E/FY26E EPS as we continue to build revenue/EBITDA/APAT CAGR of 7.6%/8.5%/10% over FY24-26E. We roll-forward our target price to Sep’26E EPS, giving us a revised target price (TP) of Rs2,845. Recent run-up makes us downgrade our rating a notch to NEUTRAL.

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