We interacted with the administration of Hindustan Unilever (HUVR) for an replace on total market situations. Listed below are the important thing takeaways:
Macro atmosphere and gross sales channels: With numerous elements of India progressively opening up, the administration believes the affect from the second Covid wave would have peaked in Could’21 and issues will progressively get higher. The outlook from Jun’21 onwards is optimistic, barring the emergence of a 3rd Covid wave. The rise in retailer working hours can also be a optimistic improvement. Rural continues to do higher than city, regardless of experiencing the next affect from the pandemic in 1QFY22 v/s final yr. Prediction of a standard monsoon, good Rabi harvest, favourably timed kharif sowing, and MNREGA present potential help as effectively. The fashionable commerce (MT) channel was affected.
Segmental demand tendencies: There was a decrease quantity of pantry stocking as the provision of necessities was ensured. Preventive measures like hand washing and a give attention to hygiene amongst customers continues to be seen. Hygiene and in-home classes (80% of HUVR’s portfolio) proceed ton witness wholesome demand. Demand for discretionary merchandise was impacted as city and MT gross sales, which had normalized in 4QFY21, had been affected from the second half of Apr’21 until the tip of Could’21. The affect although is lesser than final yr. The administration stated there can be some affect on the gross sales of GSKCH merchandise as a consequence of momentary destocking on account of distributor integration, which began on the finish of Mar’21.
Prices and margin: Whereas there was some softening of palm oil costs within the final two weeks, Apr’21 and Could’21 continued to witness RM inflation. Crude and tea costs have risen sequentially. Within the case of tea, there’s hope that the brand new crop, as a consequence of arrive in Jul’21, will result in a softening of costs. HUVR has taken additional worth will increase in soaps, detergents, dwelling merchandise, and tea in 1QFY22. With some affect on discretionary demand sequentially (albeit higher than 1QFY21), additional RM inflation, and elevated promoting spends, EBITDA margin will likely be beneath strain in 1QFY22.
Valuation and look at: Whereas 1QFY22 will likely be impacted by the second Covid wave, the extent will likely be far decrease in comparison with final yr. Rural continues to stay resilient, and demand in Well being, Hygiene, and Vitamin classes stays wholesome. Whereas discretionary demand will likely be affected, we count on the affect to be decrease YoY. EBITDA margin is prone to stay beneath strain owing to sequential RM inflation and better A&P spends.
From a medium-term perspective, the outlook stays optimistic. Progress in earnings has gained additional momentum in recent times (~18% EPS CAGR within the 4 years ended FY20 v/s ~12% CAGR over the ten years ended FY20). Regardless of a extremely disruptive yr, HUVR posted an EPS progress of 11.5% in FY21. That is significantly spectacular given the weak mid-single-digit earnings progress posted by (a lot smaller) friends in recent times.
We preserve our Purchase score with a TP of Rs 2,780 per share.