Hindustan Unilever (NS:HLL): HUL reported higher-than-expected revenue and volume growth; however, volume growth saw sequential deceleration on three-year CAGR. Domestic revenue (ex-GSK) was up 9% on a three-year CAGR (8% in Q4), with volume CAGR seeing slight deceleration at 1.7% (6% YoY) vs. ~3% CAGR in the previous three quarters. The volume growth was broad-based despite the industry declining 6% YoY. The company continued to gain market share as regional/small players faced inflation pressures. Home Care continued to be the outlier, growing 12% on three-year CAGR, while BPC clocked 6%. HFD continued to remain subdued due to a high retail inflation impacting demand. Gross margin, at 47.4%, came in line as RM inflation sustained. EBITDA growth was at 14% (HSIE 11%). With the inflationary trend still sustaining, we expect near-term demand and margin pressure to continue. With ongoing demand disruptions in mass segments and structural pressures from new age/D2C brands in the premium space (as highlighted in our recent thematic), we see limited surprise opportunities for HUL. We give 45x P/E on Jun-24E EPS to derive a TP of INR 2,100. Maintain REDUCE.
Ambuja Cements (NS:ABUJ): We maintain our REDUCE rating on Ambuja Cements (ACEM), with an unchanged TP of INR 360/share (SOTP based), owing to its expensive valuation. ACEM reported decent performance, led by 15% YoY volume uptick (94% utilisation). In a high-cost environment, it reported a healthy EBITDA margin of INR 926/MT (though 38% down YoY). The company has noted that its ongoing 8.5mn MT expansions (1.5mn MT in Punjab by CY23 and 7mn MT in the east) are on track. It will be commissioning 53MW WHRS across plants in Q3CY22, reducing its power costs.
ICICI Lombard General Insurance Company Ltd (NS:ICIL): ICICI Lombard (ICICIGI) reported an in-line revenue; however, reinvestments in retail health resulted in higher-than-expected Opex ratios (30.4%, +320bps vs. est.), dragging calculated CORs to 105% and APAT to INR3.5bn (8% below estimates). We expect loss ratios in the health segment to normalize during the rest of FY23, while we also expect loss ratios in the motor segment to improve on the back of a growth rebound. We trim our FY23E/FY24E earnings by 6%/12% to factor in management guidance on elevated Opex ratios in the near term. Given the stock’s sharp correction and strong demand outlook in motor insurance, we upgrade the stock to ADD (from REDUCE), with a TP of INR1,370 (implying a Mar-24E PE of 32x and a P/ABV of 5.4x).
HeidelbergCement (ETR:HEIG) India Ltd (NS:HEID): We maintain our REDUCE rating on Heidelberg Cement (HEIM), with an unchanged target price of INR 180/share (8x Mar-24E EBITDA). In the absence of any major planned expansion for the next three years, we expect subdued volume growth and loss in market share to continue, as other players expand in HEIM’s core markets. HEIM reported weak results due to continuous volume decline and sharp fuel cost inflation, which pulled profitability down. Reported EBITDA came in below ours and consensus estimates on higher-than-estimated costs. Volume declined 6% YoY, while adj NSR improved 10% QoQ. Thus, due to strong realization, adj unitary EBITDA recovered 14% QoQ to INR 855/MT (down 23% YoY). The company has opted for a lower tax rate from FY23. HEIM started receiving solar power under its long-term power purchase agreement (green power share increased to 30%). HEIM guided that its power and fuel costs peaked in Q1. As there is no major ongoing Capex, the net cash balance has increased to INR 2.24bn at Jun-22 end vs INR 1.34bn QoQ.
Hindustan Unilever
Resilient performance
HUL reported higher-than-expected revenue and volume growth; however, volume growth saw sequential deceleration on a three-year CAGR. Domestic revenue (ex-GSK) was up 9% on a three-year CAGR (8% in Q4), with volume CAGR seeing slight deceleration at 1.7% (6% YoY) vs. ~3% CAGR in the previous three quarters. The volume growth was broad-based despite the industry declining 6% YoY. The company continued to gain market share as regional/small players faced inflation pressures. Home Care continued to be the outlier, growing 12% on a three-year CAGR, while BPC clocked 6%. HFD continued to remain subdued due to high retail inflation impacting demand. Gross margin, at 47.4%, came in line as RM inflation sustained. EBITDA growth was at 14% (HSIE 11%). With the inflationary trend still sustaining, we expect near-term demand and margin pressure to continue. With ongoing demand disruptions in mass segments and structural pressures from new age/D2C brands in the premium space (as highlighted in our recent thematic), we see limited surprise opportunities for HUL. We give 45x P/E on Jun-24E EPS to derive a TP of INR 2,100. Maintain REDUCE.
▪ Marginal beat on volume: Revenue grew 20% YoY (13% in Q1FY22 and 11% in Q4FY22), with home care/BPC/F&R growing 30/17/9% (12/5/23% three-year CAGR). Domestic revenue grew 19% YoY, a beat on our estimates (HSIE 16%), led by better-than-expected volume growth (+6 YoY vs. +4% HSIE). Growth in home care was broad-based, with both fabric wash and household care values growing in high double digits YoY. BPC growth was driven by double-digit growth in hair care, soaps, and soft base for skin care and color cosmetics. F&R growth was led by ice cream. With inflation impacting both urban and rural demand, we remain cautious about the growth outlook.
▪ In-line EBITDA margin: Gross margin contracted by 309bps YoY (-139bps in Q1FY22 and -301bps in Q4FY22) due to high commodity inflation. Home care EBIT margin expanded by 19bps YoY (-134bps in Q1FY22) to 17.6%. BPC EBIT margin, at 26.3%, contracted 184bps YoY (+7bps in Q1FY22). F&R margin contracted 214bps YoY to 15.9% due to an unfavorable product mix. Employee/A&P/other expenses grew by -3/30/4% YoY. EBITDA margin contracted 114bps YoY to 22.8% (-114bps in Q1FY22; -27bps in Q4FY22). EBITDA grew 14% YoY (HSIE 11%).
▪ Call takeaways: (1) HUL continued to gain volume and value market share in more than 75% of its portfolio. (2) Despite the recent correction in palm oil price, inflation across many other commodities is at its decadal peaks. (3) INR depreciating against USD is also impacting input prices. (4) Industry demand is weak, with a 6% demand volume contraction seen in the quarter, of which 3% was in urban India and 7% in rural. (5) In the long term, rural demand and urban demand are in tandem. (6) ETR for FY23 is at 26%.
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