Hindustan Unilever Limited gains back its strength in Q2FY23

Hindustan Unilever is the largest FMCG company in India with more than 40 brands across categories. It is the market leader in fabric wash, personal wash, cosmetics, shampoos, and many other categories and has a distribution reach of 8.5 million outlets with a direct network of more than 3.5 million. The company with a market cap of Rs 6,23,765 crores recently announced its Q2FY23 results on 21 st October 22. HUL reported a healthy double-digit revenue growth brought in mainly by growth in home care volume which was supported by better pricing. Overall, the company marginally beat the broker’s estimates but couldn’t win investors’ support as the stock continuously plunged for two consecutive trading sessions. So, it becomes important to decipher the Q2FY23 numbers with a longer-term horizon.

HUL results Q2FY23: Revenue grew YoY with healthy growth across the home care segment

In Q2FY23, HUL’s profit after tax (PAT) increased 19.6% to Rs 2,616 crores from Rs 2,187 crores, thanks to improved operating performance and a tax credit of Rs 260 crores from past assessments, which increased earnings because of lower tax liability. While revenue increased by 16% to Rs 14,751 crores from Rs 12,724 crores in Q2FY22, the increase in product pricing was mostly responsible.

Meanwhile, volume growth throughout the period was 4%. The expansion of the home care segment, which saw double-digit, significant sales growth, is another major factor in the increase in revenue.

The home care and beauty & personal care (BPC) divisions each experienced sales growth of 34% and 11.2%, respectively. However, the Foods & Refreshment segment experienced an increase of 3.7% in Q2FY23.

Double-digit volume increase and escalating pricing growth have both contributed to the 34% growth in the home care market. In contrast, pricing growth accounts for practically all of BPC growth. However, luxury skincare and colour cosmetics brands (Lakme and Ponds) had volume growth in the mid-single digits. Last but not least, the tea market enjoyed mid-single-digit volume growth and market share increases.

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HUL results Q2FY23: EBITDA saw growth YoY while margin % fell YoY

In light of the company’s inventory of high-cost raw materials (palm oil, crude derivatives), gross margins decreased by 5.8%. The company has chosen to reduce advertising and overhead spending by 249 bps and 163 bps, respectively, as a result of the sharp contraction in gross margin. Operating profit (EBITDA) increased 7.8% YoY to Rs 3,377 crores from Rs 3,132 crores in Q2FY22 despite the operating margin declining by 176 bps to 23.3%.

Furthermore, prices for crude, soda ash, and skim milk powder (SMP) continue to rise. Additionally, during the quarter, currency depreciation amplified margin pressure. As a result, HUL has increased prices for several types of home care. While prices in the tea and coffee segments are predicted to decline over the next 6 to 9 months, this could impact their profits.

Other Key updates & Management highlights:

During the quarter, the company introduced two new brands in the skincare category: “Acnesquad” and “Find your Happy spot.” With numerous new items, variants, and relaunches in the nutrition, skincare, cosmetics, beverage, ice cream, and beverage portfolios during the quarter, innovation levels also remained high.

Management also said during the concall with analysts, “The biggest determining factor for demand recovery will be a commodity price correction in the broader basket.” While they further added, “The FMCG market is growing in value at a three-year CAGR of 5% while volume is declining at a similar rate in both urban and rural regions.” According to analysts, the three-year CAGR for volume growth at HUL is close to 3%.

Univest View along with Technical Analysis

In October 2022, HUL reduced its prices primarily to pass along the benefits of the drop in the price of palm oil. However, prices for other commodities continue to rise, including petroleum, soda ash, milk, and barley. Although gross margins are probably going to get better sequentially, they will still be lower YoY in the upcoming quarters. Nevertheless, the company’s cost-cutting plan and adjusting marketing expenditures would aid in maintaining greater operating margins. Investors can therefore assume that volume growth will be the single most crucial aspect in the following quarters.

On the technical charts, the HUL stock can be seen correcting at the start of 2022, which after it reached it bottom in March, the stock started its upward journey. While currently the stock can be seen consolidating in a sideways trend. Most likely the stock will break its resistance and will make a new high, as an up-flag pattern can also be seen forming. Whereas, if it moves below support with 50 EMA coming below 100 & 200 EMA, the stock can be retracted back to June’22 levels. Upon announcement of results, the stock saw its price falling in two consecutive quarters.

ICICI Direct said, “We remain positive on growth prospects as well as margin expansion possibility in the long run. At current valuation multiples, most positives are discounted. We maintain our HOLD rating with a revised target price of Rs 2800/share.”

Whereas, HDFC Securities has opposing views, as they went on to add, “We do not expect a quick volume and margin recovery in H2FY23. With ongoing demand disruptions in mass segments and structural pressures from new-age brands in the premium space (as highlighted in our D2C thematic), we see limited surprise opportunities for HUL. We value the stock at a TP of Rs 2,200. Maintain REDUCE.”

On the Univest App, Hindustan Uniliver has a ’Hold’ rating with a neutral stance on fundamentals & short trends. The reason is that the company saw margins still under pressure in Q2FY23, with consolidating stock prices. Whereas in long term, the stock appears to be bullish as per the Univest app. Therefore, existing investors should continue to hold shares while new investors should wait till the next quarterly results for margins to make a robust recovery. Further, a key parameter to be noted is volume growth across different segments rather than pricing growth, for the company to sustain margins in the longer run.

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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