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With harsh summer and price cuts lift Q1 volumes

HUVR’s Q1FY25 print was in-line with our estimates; Revenue/EBITDA/APAT grew 1.3%/ 2.4%/3.1%, led by negative pricing and 4.0% volume growth. Given high food inflation impacting mass consumption, management cited it saw some green shoots and recovery in rural markets. With drop in prices for top-4 commodities – CPO, caustic soda, crude oil, and soda ash, gross margin inched up to 51.4% (+154bp). Despite higher ad-spends +11% (+200bp), and other expenses +6.9%, with lower employee costs by 7.5%, EBITDA grew 1.4%, settling EBITDA margin at 23.5% (+26bp) YoY. To maintain price-value equation, HUVR took pricing actions in mass detergents, soaps and BPC portfolio, yet expects gross margins to improve given premium mix and operating leverage despite increase in media spends. We remain cautiously optimistic expecting low-single digit volume growth as near term operating environment continue to be competitive. Considering management commentary on price increases in 2HFY25 we have tweaked earnings and retain Reduce rating, with a revised DCF-based TP of Rs2,636 (implying 49.2 FY26E EPS). Q1FY25 revenues grew 1.3%; Home care +4%, Beauty +3.1%, F & R +1.4%, P/Care -4.5%

HUVR’s domestic business grew 1.3% on account of negative pricing in detergents and soaps led to 4.0% volume growth. Segmental growth: Home care grew +4.0% with HSD volume growth, Beauty and Wellbeing grew +3.1% led by MSD volume growth, Personal Care declined -4.5% with LSD volume growth, and with stable volumes F&R grew +1.4%. Indeed, given high food inflation impacting mass consumption management cited that it saw some green shoots and recovery in rural markets. More importantly, hair care clocked DD growth led by Clinic plus/ Sunsilk/ Dove, yet Skin care saw muted volumes. Management cited down-trading in tea, yet Coffee grew DD. Notably HFD performance was muted and Ice-creams saw DD growth. To serve the evolving aspirations of consumers, HUVR has embarked on a journey of ‘Transform to Outperform’ led by, (1) grow the core, (2) drive premiumisation, (3) reshaping portfolio in high growth spaces, and (4) Lead in channels of future. HUVR remain optimistic on volume growth with better monsoon and govt. spending on infra to lift rural consumption.

Operating environment remain tough; persistent price cuts, and ad-spends to hold margins

In Q1 with cut in prices in top-4 commodities – CPO, caustic soda, crude oil, and soda ash, gross margin increased 51.4% (+154bp). Despite higher ad-spends +11% (+200bp), other expenses +6.9%, with lower employee costs by 7.5%, EBITDA grew 1.4%, settling EBITDA margin at 23.5% (+26bp) YoY. To maintain price-value equation, HUVR initiated further price cuts in mass soaps and BPC portfolio though expects to maintain stable margins.

Outlook remains cautiously optimistic; increase in royalty rate at 3.65%

Management said, FMCG and rural demand improving gradually. With benign inflationary scenario regional competition impacting volumes in the highly penetrated categories such as soaps, detergents and mass beauty. To lift volumes HUVR may need to invest more in A & P spends. Further, (1) increase in royalty at 3.45%, (2) cut in distribution fees from GSK portfolio, and (3) price cuts to check margins in our view, though expect ~4% volume growth in FY25E.

Valuation and risks

We expect gradual recovery in the discretionary spends and inherent distribution strength to drive Beauty & Wellbeing, and GSK-CH business. Though margins could remain in tight band, given inflationary cycle and high ad-spends, HUVR expects premium mix and operating leverage provide cushion. Considering margin recovery we increased earnings by 1.2%/1.3% for FY25E/FY26E and retain Reduce rating, with a revised DCF-based TP of Rs2.636 (implying 49.2 FY26E EPS). Risks to our call include significant acceleration in volume/price, decrease in ad-spends leading to margin expansion & lower competitive intensity.

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