Q1FY24 Review: Hindustan Unilever: Volume outlook remains uncertain

21 Jul 2023 , 11:36 AM

HUL delivered a top-line growth of 6% driven by a volume growth of 3% (vs Analysts of IIFL Capital Services estimate of 4.5%). The miss was mainly led by Coffee where lower intake was due to higher commodity costs and HFD segment which is suffering from high milk inflation. The rural growth has turned positive over a low base, however the overall volume growth to be gradual with the moderation of inflation. Along with this, price anniversaries in coming quarters to drag the revenue growth for HUL in the near term. However, a large beat in gross margin is a positive for the stock. Analysts of IIFL Capital Services cut their EPS by 3%/2% for FY24/FY25 and maintain ADD with a TP of Rs2850.

Sub-par performance: 

Volume growth came in lower at 3% (vs 4% in Q4) due to mid-single digit volume decline in Coffee and Ice-cream categories. Net sales increased by 6.3% (1.5% below Analysts of IIFL Capital Services estimate) led by 10% growth in home care segment. Household care have recorded double-digit growth in volume terms. Despite gross margin expansion of ~310bps YoY, Ebitda growth came in at ~8% led by 22%YoY increase in other expenses during the quarter Higher Other expenses was driven by increase in Royalty, higher investments behind capabilities and one-offs in the base quarter.

Price actions to drag revenue: 

Price anniversaries, along with the recent price cuts taken in skin cleansing and laundry segments have started denting the revenue growth for HUL. And, with further anniversaries in coming quarters, revenue growth would decline significantly unless volume growth catches up. The company expects pricing to be flat to marginally negative in near term and a gradual improvement in the volumes with moderation in inflation. This could lead to a single digit revenue growth in the near term. Margin expansion is expected to be gradual with price cuts taken and increase in ad-spends.

EPS cut of 2-3%: 

Analysts of IIFL Capital Services cut their EPS estimates for FY24/FY25 by 3%/2% to factor in the slower than expected revival in volumes. However, HUL’s push for premiumization and the decline in commodity prices will result in margins improvement in the medium term. They expect a sales/Ebitda/PAT Cagr of 8.7%/11%/11.1% over FY23-26. The stock trades at 51x FY25 EPS. They maintain their ADD rating with a TP of 2850.