Hindustan Unilever Rating: Buy – Volumes were strong despite Covid wave

Hindustan Unilever (HUL) reported Q1FY22 net sales (up 12.8% y-o-y), Ebitda (up 7.7% y-o-y) and adjusted PAT (up 4.4% y-o-y) ahead of our estimates. Domestic volumes rose 9% y-o-y on a base of -8% y-o-y, ahead of expectations. Growth was broad-based with all segments clocking strong double-digit growth. April saw sustained growth momentum from Q4FY21; subsequently, the shoot-up in Covid cases made May a challenging month. June marked a rebound to Mar-21 levels; all in all, HUL exited the quarter on a strong note.

Overall, an improving portfolio mix combined with cost control, price hikes and synergies from the GSK takeover should aid Ebitda margin despite inflationary input prices. Retain Buy with a TP of Rs 2,900.

Broad-based growth: HUL logged strong volume growth of 9% y-o-y despite the second wave. The company has ramped up e-commerce operations, whose contribution has doubled since Q1FY21. 80% of the business is gaining relative penetration. The home care segment grew 12% y-o-y enabled by double-digit growth in Fabric Wash. Beauty & Personal Care grew 13% y-o-y led by Hair Care and Skin Care, both growing in high double-digits. Foods & Refreshment delivered another quarter of strong performance, up 12% y-o-y.

The HFD portfolio is gaining penetration sequentially; its volumes grew in mid-single digit. Gross margin dipped 146bps y-o-y due to a spike in inflation in a few key raw materials (tea, palm oil); q-o-q, gross margin dipped 216bps due to the second wave’s impact on the discretionary portfolio. Cost optimisation restricted Ebitda margin dip to 114bps y-o-y.

Conference call takeaways: Q1FY22 pricing is ahead of Q4FY21. The sequential lower difference in value and volume is down to Covid-led promotions volatility. With commodity prices at multi-year high levels, the company is looking to make sensible pricing decisions to maintain its healthy volume growth. As mobility improves, the mix would improve; hence margins too will improve.

Outlook: On a firm footing – We expect HUL to be a key beneficiary of strong rural demand. Demand situation is dynamic though due to Covid-19 uncertainty; however, HUL is well placed in terms of supply chain preparedness. We retain ‘BUY/SO’ with a TP of Rs 2,900. The stock is trading at 51.5x FY23e EPS.