Results Review for Hindustan Unilever, UTI Asset Management Company

  • Stock Market Analysis
  • Editors Pick

Hindustan Unilever (NS: HLL ): HUL reported slightly better revenue growth in a challenging period. Domestic revenue/volume YoY growth was at 10% flat while the FMCG market registered +2/-8%. HUL continued to enjoy share gain as regional/small players faced inflation pressures. Home care was the outlier with 24% growth while BPC and F&R clocked slow growth. Grammage reduction impacted volume growth by 2-3%, while price hikes continued to be the sole driver. Demand outlook remains a concern, with volume decelerating in both rural and urban India. RM inflation continued to impact gross margin, which was down 301/206bps YoY/QoQ to 49.5% (HSIE 50.5%). EBITDA growth was at 9.7% (HSIE 5%). With geopolitical issues aggravating commodity inflation, we build in margin pressure for the near term. With ongoing demand disruptions in mass segments and structural pressures from new-age brands in the premium space (as highlighted in our recent thematic), we see limited surprise opportunities for HUL. We maintain our EPS estimates for FY23/FY24. We give 45x P/E on Mar-24E EPS to derive a TP of INR 2,000. Maintain REDUCE.

UTI Asset Management Co Ltd (NS: UTIA ): UTIAM reported a weak quarter despite improvement in equity yields, given a sharp rise in staff costs and administration expenses, resulting in a 15% miss on core operating profit. Moderating yields and elevated staff costs continue to drag core profitability (EBIT margin at 36%, a five-quarter low). While we draw comfort from management commentary around a buoyant flow environment and a strong growth outlook for the retirement solutions business, we remain wary of continued pressure on yields and staff costs in the medium term. We reduce our APAT estimates by 10-9 % over FY23E-24E to build in higher employee costs. We expect UTIAM to deliver FY21-24E 7% revenue CAGR and 8% operating profit CAGR, as a consequence of strong AUM growth and slight cost rationalization. Given its attractive valuation, we maintain BUY with a revised TP of INR1050 (26.5x Sep-23E NOPLAT + Sep-22E cash and investments).

Hindustan Unilever (LON: ULVR )

Home care saves the day; margin pressure continues

HUL reported slightly better revenue growth in a challenging period. Domestic revenue/volume YoY growth was at 10%/flat while the FMCG market registered +2/-8%. HUL continued to enjoy share gain as regional/small players faced inflation pressures. Home care was the outlier with 24% growth while BPC and F&R clocked slow growth. Grammage reduction impacted volume growth by 2-3%, while price hikes continued to be the sole driver. Demand outlook remains a concern, with volume decelerating in both rural and urban India. RM inflation continued to impact gross margin, which was down 301/206bps YoY/QoQ to 49.5% (HSIE 50.5%). EBITDA growth was at 9.7% (HSIE 5%). With geopolitical issues aggravating commodity inflation, we build in margin pressure for the near term. With ongoing demand disruptions in mass segments and structural pressures from new-age brands in the premium space (as highlighted in our recent thematic), we see limited surprise opportunities for HUL. We maintain our EPS estimates for FY23/FY24. We give 45x P/E on Mar- 24E EPS to derive a TP of INR 2,000. Maintain REDUCE.

▪ Beat on volume: Revenue grew 1 1% YoY (35% in Q4FY21 and 10% in Q3FY22), with home care/BPC/F&R growing 24/4/5% (11/2/11% three-year CAGR). Domestic revenue grew 10% YoY, a beat on our estimates (HSIE 6%), led by better-than-expected volume growth (flat YoY vs. -3% HSIE). Growth in-home care was broad-based with both fabric wash and household care values growing in high double digits YoY. BPC growth, at 4%, was mainly led by double-digit growth in skin cleansing, while the rest of the portfolio was weak. F&R growth, at 5%, was led by food and ice cream. The growth outlook remains weak in the near term, with rural pick-up being the key monitorable.

▪ In-line EBITDA margin: Gross margin contracted by 301bps YoY (-117bps in Q4FY21 and -186bps in Q3FY22) due to high commodity inflation. Home care EBIT margin contracted by 1 38bps YoY (+216bps in Q4FY21) to 19.8%. BPC EBIT margin, at 2 6.2%, contracted 129bps YoY (+266bps in Q4FY21). F&R margin expanded 290bps YoY to 19.3% due to cost synergies in the nutrition business and ease in tea prices. Employee/A&P/other expenses grew by 4/- 9/7% YoY. EBITDA margin contracted 27bps YoY to 24.1% (146bps in Q4FY21; 99bps in Q3FY22). EBITDA grew 10% YoY (HSIE 5%).

▪ Call takeaways: (1) HUL continued to gain volume and value market share in more than 75% of its portfolio. (2) It generates >75% of its revenues from its top 16 brands. (3) Indonesia consumes 1/3rd of the palm oil it produces. Export of palm oil ban will have short-term supply/pricing issues. (4) HUL’s premium portfolio has grown 2x of its non-premium portfolio. (5) Transition of the nutrition business has been completed, with direct reach now being 2x compared to pre-integration. (6) The company is launching bridge packs to provide value to its customers while taking calibrated price hikes. (7) Near-term margin will be under pressure.

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