Q3FY24 Review: Hindustan Unilever: No pickup in volume growth

23 Jan 2024 , 02:33 AM

HUL reported Q3FY24 results below analysts of IIFL Capital Services estimates, with volume growth of 2% (in-line), flattish sales and adj. PAT decline of 1%. Volumes grew in mid-single digits in Home and Personal Care segments, while declining in low single digits in Foods & Refreshment. Going forward, management expects gradual recovery in volume growth, contingent on a pickup in rural incomes and a good winter crop. At 52x FY25 EPS, valuations are rich and a delay in recovery could lead to earnings cuts. Analysts of IIFL Capital Services downgrade their EPS estimates for FY24/25/26 by ~1%/3%/3%. Maintain ADD ; TP Rs2,800. 

Below estimates: 

HUL reported a volume growth of 2% (in-line and had reported 2% in Q2FY24), with mid-single digit volume growth across Home and Personal Care segments; offset partially by a low-single-digit decline in Foods & Refreshments. Overall sales were flat due to price corrections in both Home and Personal Care segments. Ebitda declined by 1% (3% below analysts of IIFL Capital Services estimate) with gains from gross margin expansion offset by higher ad-spends and increase in Other expenses. Within segments, there was a wide variation in Ebit performance with Home Care declining by 9%/ Personal Care being flattish and F&R growing by 8%. 

Expect gradual recovery: 

Overall consumer sentiments remain weak with economic recovery being uneven – urban is outgrowing rural and premium is outgrowing mass – management is hopeful of a gradual recovery banking on a good winter crop and growth in rural incomes. With commodity prices remaining benign, competitive intensity — especially from regional and smaller players — would remain high, which may result in temporary market share loss in H1CY24. 

EPS downgrade for FY24/25/26 by ~1%/3%/3%: A recovery in volume growth trajectory, coupled with favourable price + mix should aid acceleration in sales growth from ~3% in FY24 to ~8%/10% in FY25/26. However, this would require good execution in tea and HFD categories, segments where HUL is experiencing volume declines. Trading at 52x FY25 EPS, valuation is rich and a delay in recovery is likely to weigh on stock price. Analysts of IIFL Capital Services cut their EPS estimate for FY24/25/26 by ~1%/3%/3% and re-iterate ADD rating; TP of Rs2800.