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Hindustan Unilever Ltd>
  • CMP : 2,442.2 Chg : 0.90 (0.04%)
  • Target : 2,780.0 (12.60%)
  • Target Period : 12-18 Month

28 Apr 2023

Slower volume recovery in BPC, foods segment…

About The Stock

Hindustan Unilever (HUL) is the biggest FMCG company in India with more than 40 brands across categories. It is the market leader in fabric wash, personal wash, cosmetics, shampoos and many other categories.

  • The company has a distribution reach of ~8.5 million (mn) retail outlets with a direct network of more than 3.5 mn outlets
  • HUL commands gross margins of ~50%, which gives it leeway to spend 8-12% on advertisement & promotions
Q4FY23 Results

HUL posted 11% sales growth led by 4% volume uptick.

  • Sales were up 11% YoY driven by strong growth in home care segment
  • EBITDA was at ₹ 3471 crore, up 7.0% YoY, with margins at 23.7%
  • Consequently, PAT was at ₹ 2552 crore (up 9.7 YoY)
What should Investors do?

HUL’s share price has gone up by 68% over the past five years (from ₹ 1464 in April 2018 to ₹ 2469 levels in April 2023).

  • Despite price cuts and a sequential increase in A&P, volumes are still growing at a feeble pace; rural demand recovery is delayed
  • We maintain our HOLD rating on the stock 
Target Price and Valuation

We value HUL at ₹ 2780 i.e. 55x P/E on FY25E EPS.

Key Triggers for future price performance
  • Strong volume growth of 9% in FY23 in home care segment reflects premiumisation trend in fabric wash through surf excel. The company has taken price cuts in term of grammage increase in LUPs, which would aid volume growth in the segment
  • Reliance’s entry into personal care segment could compel the company to take aggressive price cuts, which would keep margins under pressure
  • The company is driving more than 30% of its sales through digital channels like e-commerce, Shikhar app (reach of 12 lakh outlets), D2C, etc.
Alternate Stock Idea

Besides HUL, we like TCPL in our FMCG coverage.

  • Strong innovation and premiumisation strategy in salt, tea, Sampann and Soulful in the Indian market are expected to drive sales and margins
  • We value the stock at ₹ 980 with BUY rating

Key Financial Summary

(| Crore) FY20 FY21 FY22 FY23 5 Year CAGR (18-23) FY24E FY25E 2 Year CAGR (23-25E)
Total Operating Income 38,785.0 45,996.0 51,193.0 59,144.0 0.1 63,850.8 70,331.6 0.1
EBITDA 9,600.0 11,324.0 12,503.0 13,632.0 0.1 14,930.0 16,764.8 0.1
EBITDA Margin % 25.1 25.0 24.8 23.4 - 23.8 24.2 -
Net Profit 6,738.0 7,954.5 8,818.0 9,962.0 0.1 10,670.4 11,993.9 0.1
EPS (|) 31.2 33.9 37.5 42.4 0.1 45.4 51.1 0.1
P/E 79.1 72.9 65.8 58.2 - 54.3 48.3 -
RoNW % 85.7 17.1 18.1 19.9 - 20.6 22.5 -
RoCE (%) 89.5 18.9 20.2 22.0 - 23.7 25.9 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY23 Results: Volume grows 4%; margins improve sequentially…

  • HUL witnessed net sales growth of 11% to | 14638 crore led by 4% volume growth & 7% pricing growth. The company has cut prices in soaps earlier in the year, which is reflecting in prices from H2FY23 numbers . Home care, Beauty & Personal care (BPC) & Foods business witnessed a sales growth of 18.7%, 10.1% & 2.6% respectively

 

  • Home care segment growth of 18.7% was led by mid-single digit volume growth. With softening of crude & related commodity prices, the company has taken price cuts in detergent segment in April-2023. This would be reflected in FY24 numbers

 

  • Fabric wash category saw double digit value growth during the quarter. Household care (dishwash, floor cleaners) category witnessed double digit volume as well as value growth in Q4. Premiumisation trend continues in with strong growth in Liquid detergent & Surf excel

 

  • The 10.1% growth in BPC segment was driven by double digit growth in skin cleansing, skin care & colour cosmetics. Skin cleansing growth was led by ‘Lux’. Though, the company has taken price cuts in last six months, the growth in the segment is still largely driven by prices. The company has launched new Skin care Brand ‘Novology’ in Masstige beauty segment

 

  • Hair care & oral care categories saw mid-high single digit growth during the quarter. Close-Up and premium hair care brands have been growing at a steady pace for the company

 

  • Foods business growth of 2.6% was aided by mid-single digit growth in ice creams, HFD & foods portfolio. Tea segment saw decline in value term mainly due to down grading in the segment with benign prices of loose tea compared to premium tea. However, tea volumes grew by 3%. Coffee grew in double digit

 

  • HFD category growth has been adversely impacted by high inflation in milk & Barley. Unseasonal rains during the quarter impacted ice cream sales

 

  • Home care segment margin was down 104 bps to 18.7%, BPC segment margin was down 15 bps to 26.1% & foods segment margin was down by 138 bps to 17.9%

 

  • On a full year basis, home care business witnessed a growth of 28% led by 9% volume growth. Surf excel cross US$ 1 bn (> | 8000 crore) in FY23. Liquid home care brands crossed | 3000 crore sales in FY23. The company has been able to develop liquid category over the years, which helped it to drive premiumisation specifically in fabric care category

 

  • In FY23, BPC segment saw 12% sales growth with low single digit volume growth. ‘Lux’ & ‘Ponds’ cross | 2000 crore sales each. Five BPC brands are | 2000 crore + brands

 

  • During the year, foods & refreshment segment saw 5% sales growth with low single digit volume growth led by ice cream, coffee & foods. Knorr & Kisaan are growing at faster pace. The company divested Annapurna brand operating in Atta & Salt

 

  • Though HFD category is struggling to grow in high inflationary (milk & Barley prices remained elevated) period, the company continues to gain market share with new product development. The company has remained market leader in tea segment, it has grown faster compared to nearest competitor

 

  • Gross margins contracted 84 bps YoY but improved sequentially 120 bps. Employee & overhead spends were up 48 bps & 29 bps, respectively. Overhead spends were higher due to increase in royalty. Marketing spends were cut by 92 bps in Q4FY23

 

  • Operating profit witnessed growth of 7% to |3471 crore with 89 bps operating margin contraction. Net profit witnessed a growth of 9.7% to | 2552 crore

 

  • Commodity prices have softened in last six months with crude, soda ash, caustic soda, palm oil have declined by 16%, 6%, 25% & 39% respectively. However, these commodities are still above the 10-year median prices. Barley & Milk prices are still higher by 8% & 18% YoY respectively. Only tea prices have been benign on one year as well as long term median basis

 

  • With decline in commodity prices, the steep price hikes taken in last two years (cumulative 18%) started coming down with selective price cuts in BPC as well as detergent category. Pricing growth of 12% in June & September quarter has come down to 7% in March quarter

 

  • FMCG market continues to grow through prices with 11% price growth & flat volume in March quarter. Rural volume still seen declining trend during the quarter. However, the extend of decline has come down continuously

  • Other income saw 31.1% growth due to higher treasury income. Exceptional income includes proceeds from the divestment of Annapurna brand in salt & atta category

Disclaimer

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