Q4FY23 Review: Hindustan Unilever: Volume revival remains key

28 Apr 2023 , 11:10 AM

HUL delivered a top-line growth of 11%, driven by a volume growth of 4% (versus IIFL Capital Services’ estimate of 5%). The miss was mainly led by Tea, which was impacted by customers downgrading to loose tea and HFD segment which is suffering from high milk inflation. Results are in line with the thesis highlighted in IIFL Capital Services’ FMCG note that the macro situation has not recovered yet to drive volume growth in the FMCG space. Along with this, price anniversaries in coming quarters are to drag revenue growth for HUL in the near term. However, large beat in gross margin is a positive for the stock. 

Volume growth came in at 4% (versus 5% in Q3). Net sales increased by 11% (1.5% below IIFL Capital Services’ estimate) led by 19% growth in Home Care segment. Discretionary categories such as Skin Care and Skin Cleansing have also recorded double-digit growth in value terms. However, EBITDA growth was in-line at 8.3% YoY, due to better gross margins led by cooling of commodity price inflation.

The company has taken 18% price hike in past 2 years to combat inflation with major price hikes in Home Care. Price anniversaries have started denting revenue growth for HUL, and with further anniversaries in coming quarters, revenue growth would decline significantly unless volume growth catches up. The company expects gradual improvement in volumes, with price cuts in Skin Cleansing and Laundry segments. This could lead to a single-digit revenue growth in the near term. Margin expansion is expected to be gradual with price cuts taken and increase in ad-spends.

HUL’s push for premiumization and decline in commodity prices will result in margins improvement in the medium term. Analysts at IIFL Capital Services expect Sales/EBITDA/PAT CAGR of 9.4%/11.7%/11.6% over FY23-26. The stock trades at 46 times FY25 EPS.