HUL - Growth Lagging Expectation: HDFC Securities

HDFC Securities Institutional Equities

Our interaction with Hindustan Unilever Ltd. management reinforced our thesis that demand pickup will be gradual and meaningful volume recovery will not be visible in the near term. The rural trend remains stable, with no further improvement or deterioration over the last quarter. Urban demand sustained recovery.

With HUL initiating price cuts to adjust for a softening commodity basket, value growth will continue to tail off, thereby reducing the divergence between volume and value growth. As per HUL, it takes three to four quarters between price cuts and demand upticks, thereby recovery will be more back-ended.

Retailers too continue to keep lower inventory (price cut phase), impacting primary growth in the near term (a similar trend in Q1). With falling raw material inflation, regional and unorganised players are also becoming competitive (versus last two years).

Inadequate pricing action (18% versus 30% cost inflation) negatively impacted gross margin (-600 basis points last two years); HUL has already recouped 400 basis points of the gross margin.

The incremental expansion will be slower (expect sequential expansion in Q2) as the company is also passing off benefits to consumers. Moreover, advertising and promotion spending will also step up along with a royalty rate increase in FY24.

We cut our earnings per share estimates for FY24-FY26 by 2%. We value HUL at 47 times price/earning on September-25 EPS to arrive at a target price of Rs 2,550. Maintain 'Reduce'.

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