Q2FY24 Review: Hindustan Unilever: Gradual pickup in volume growth

20 Oct 2023 , 12:45 PM

HUL’s 2% volume growth came below our estimate of 3.5%; but at 3%, sales growth (ex. one-off) was in line with estimate. The volume miss was driven by the Food and Refreshment (F&R) segment, which declined mid-single digit, while other segments witnessed mid-single-digit growth in volumes. The quarter was marked by a whopping 65% YoY growth in ad spend, and despite this, profit delivery was largely in line with expectations. Analysts of IIFL Capital Services build in a gradual recovery in volume, although pricing will be marginally negative in H2FY24. They believe this quarter to mark the bottom for HUL’s performance. Maintain ADD; TP Rs2,800. 

Slight miss: 

While sales growth of 3% was in line , volume growth at 2% was below analysts’ of IIFL Capital Services estimates. Even as the company passed on the benefits of lower commodity costs in soaps and detergents, there was a price hike in the HFD segment. While Home Care and Personal Care segments posted mid-single-digit volume growth, F&R segment posted a mid-single-digit decline in volumes, driven by the impact of inflation and down-trading. Ad spends were up at 11.4% of sales, given a step-up in competitive intensity. 

Expect gradual recovery in volumes: 

HUL doesn’t envisage any more pricing actions, if commodity prices hold steady at the current levels, which should result in stabilisation of channel inventory from Q3 onwards. Some of the factors that will drive recovery in volume growth in the medium term are — moderating inflation; continued thrust by the government on infrastructure spending, especially in rural; real rural wage growth entering the positive territory. 

Maintain estimates:

Analysts of IIFL Capital Services broadly maintain their estimates post this result. They are building a 4.5%/6.5% growth in FY24 sales/Ebitda, which implies a 4-4.5% growth in sales/Ebitda in H2. With pricing actions largely done, volume growth is likely to pick up from the current trajectory, even as the overall pricing would turn slightly negative. HFD remains a concern area, but with milk prices expected to soften, that too is likely to pick up. Maintain analysts of IIFL Capital Services ADD rating with a target price of Rs2,800.