HUL Q2 Review - Volume Growth Disappoints, But Sharp Margin Improvement Drives Earnings Beat: Systematix

Systematix Research Report

Hindustan Unilever Ltd. delivered an earnings beat despite a soft volume performance led by sharp margin improvement. Revenue growth fell short of expectations at 3.6% YoY while Ebitda/ Adjusted profit after tax growth stood strong at 9.4%/ 14.2% YoY respectively.

Volume growth at 2.5% was lower than the market volume growth of 8% (two-year compound annual growth rate at 3% vs 1% for industry) given decline in segments like tea, health food drink and detergent bars indicating resurgence of competition from smaller players and continued impact on consumption of cumulative inflation.

A continued cool-off in material inflation (esp. crude and palm-related) led to sharp gross margin expansion of 692 basis points to 52.7% albeit Ebitda margin expansion was moderate at 129 bps to 24.2% given 420 bps increase in ad spends and 160 bps increase in other expenses given higher investments and royalty increase.

We expect gross margin recovery to continue, with commodity inflation continuing to moderate and premiumisation and scale leverage playing out. But Ebitda margin improvement will be tempered by the 80 bps phased increase in royalty and a continued uptick in ad spends.

The benefits of aggressive price cuts in soaps and laundry and pick-up in ad-spends should take a couple more quarters to start showing up in volumes, while pricing should get into the negative zone in near term, translating to a soft below-trend revenue growth for FY24.

We expect a rural recovery led by lower inflation, low base and better farm income expectations while urban demand especially in food categories should take some more time to see the benefits of innovation and market development.

We expect volume growth to be the sole driver for revenue growth in near-term. Margins, however, can recover significantly from the FY23 lows.

Management expects a gradual rural demand recovery and some tailwinds from the festive season. It also highlighted the 25% cumulative industry pricing over last two-three years having a protracted impact on demand, which might take a couple more quarters to normalise with pricing falling to 3% at industry level.

With competitive intensity rising, the company would need to maintain higher advertising and promotion spends and also take further price cuts if needed, which will moderate the Ebitda flow-through of expected gross margin expansion.

Looking beyond a soft FY24, laundry category still retains strong premiumisation and share gain potential while beauty and personal care segment should also recover with a pick-up in disposable income levels and company efforts on premiumization. Foods and health food drink category, however, is expected to continue to see sluggish demand for the foreseeable future.

Click on the attachment to read the full report:

DISCLAIMER

This report is authored by an external party. BQ Prime does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of BQ Prime.

Users have no license to copy, modify, or distribute the content without permission of the Original Owner.