Hindustan Unilever Rating: add- Focus on volumes showed in results

HUVR reported 4% growth in underlying volume, 7% growth in revenues and broadly flat Ebitda (all organic). Revenues were on expected lines whereas profitability was a tad weaker due to higher-than-estimated A&P. HUVR has stepped up focus on volume growth and it would continue investments in business notwithstanding margin pressure; we expect this strategy to pay off well. We tweak estimates and retain Add with unchanged FV of Rs 2,625.

Revenues on expected lines, margin miss owing to higher A&P spends: Revenues grew 21% y-o-y (organic 7%) led by underlying volume growth of 4% (organic), Ebitda grew 17% y-o-y (flattish on organic-basis), recurring PAT grew 15% y-o-y and EPS grew 7%.

GM declined 25 bps y-o-y to 54% on reported basis and was down about 220 bps y-o-y on organic basis owing to steep 40-50%+ inflation in tea and palm oil that was partly offset by price increases. Reported Ebitda margin was down 90 bps y-o-y (down about 160 bps on organic LFL basis) to 24.1% largely due to GM decline. Ebitda margin was 90 bps below our estimate due to higher-than-estimated A&P spends (up 19%/6% y-o-y on reported/LFL basis). PBT growth was impacted by lower-than-estimated other income (Rs 970 mn, down 31%/36% y-o-y/q-o-q) and higher depreciation (Rs 2.72 bn, up 17%/9% y-o-y/q-o-q).

Segmental performance—decent print except for some weakness in fabric wash: (i) Home care revenues declined 2% y-o-y as continued weakness in fabric wash more than offset upside in household care (double-digit growth) ; (ii) BPC revenues were up 9% y-o-y led by strong double-digit growth in skin cleansing, hair care and oral care; (iii) F&R segment grew 19% y-o-y on organic basis led by double-digit growth in tea (partly price-led), foods, soups and ketchup. Health, hygiene and nutrition portfolio (80% of sales) grew 10% y-o-y; (iv) discretionary products declined 1% y-o-y; and (v) out of home portfolio declined 15% y-o-y.

Prioritises volume growth/recovery, margin expansion takes backseat: We note that in 9MFY21, HUVR has absorbed some RM inflation in tea and soaps and stepped up investments in A&P for market development/share gains in hygiene, personal care and nutrition categories. Mgmt indicated that (i) its primary focus in the short term (1-2 quarters) is volume recovery/growth and investments (especially A&P) in business would remain high; and (ii) it is confident of delivering modest margin expansion every year in the medium term.