Reduce Hindustan Unilever Ltd For Target Rs.2,600 - Elara Capital
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Persistent pains
Volume growth subdued; underperforms market in Q3
In Q3FY24, Hindustan Unilever’s(HUVR IN) net sales declined 0.3% YoY, led by flat/2% YoY value/volume growth in the domestic segment, at 11.5%/3.2% four-year CAGR. Per AC Nielsen, volume growth for the market came in ahead of HUVR’s 8.9%, but on two-year CAGR, the market’s volume grew at 2%, lower than HUVR’s 3.5%. Market growth was led by urban and hence, the premium segment continued to outperform mass, as it grew 2.5x higher YTDFY24. Segments of home care and beauty & personal care saw 1% deceleration and flat growth respectively, led by mid-single digit volume growth and price reduction. However, the segment of foods & refreshment saw 1% price-led growth as volumes declined to low-single digit.
Near-term challenges persist
Salience of business winning market share has dipped from 80% in the past year to 60% now. And HUVR expects it to dip further in the next two quarters before it recovers back to 60%+ by Dec-24E. HUVR is focusing on driving competitive volume growth and increasing investments in innovation and brand development. To up category specialization, HUVR has opted to divide its beauty and personal care segment into two distinct categories: 1) Beauty & Wellbeing and 2) Personal Care. This decision is rooted in the belief that these two segments have distinct business models/competitive landscapes.
Gross margin gains to support higher advertising spend
Gross margin rose 400bps YoY to pre-inflationary margin of 51.5%, but still 200bps lower than pre-COVID level. While the easing off of inflation may positively impact gross margin, ad spend may be at higher level. The management expects to maintain EBITDA margin at ~23-24% in the near term.
Valuation: Downgrade to Reduce; new TP INR 2,600
We pare FY24E/25E/26E earnings 4.6%/6.9%/7.4% to factor in lower-thanexpected revenue growth and margin. We downgrade HUVR to Reduce from Accumulate with lower TP of INR 2,600 (from INR 2,820), as we assign 50x (from 52x on near-term challenges) on Dec’25E P/E to roll forward
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