HUL Q4 Results Review - Growth Remains Subdued: Systematix

Systematix Research Report

Hindustan Unilever Ltd. delivered soft earnings, in-line with our muted expectations with weak topline performance and decline in earnings despite sharp gross margin improvement.

While volumes were up 2% YoY, negative pricing led to a revenue decline of 0.2% YoY while Ebitda/ adjusted profit after tax declined 1%/2% YoY respectively.

Home care grew volumes in mid-single digit, while beaty and personal care and F&R saw flattish volumes. A superior mix and continued cool-off in material inflation (especially crude and palm-related) led to sharp gross margin expansion of 316 bps to 51.9% albeit Ebitda margin declined 19 bps to 23.1% primarily on account of 60 bps impact from termination of GSK consignment selling arrangement, 200 bps increase in advertising and promotion spends and 120 bps increase in employee costs/royalty.

We expect gross margin recovery to continue, with commodity inflation continuing to moderate and premiumisation/mix improvement playing out. But Ebitda margin improvement will be tempered by the 80 bps phased increase in royalty, termination of GSK business and a continued uptick in ad spends.

The impact of recent pricing cuts have started to reflect slowly in the numbers which should drive a gradual recovery in volume growth over next few quarters. But negative pricing should keep revenue growth muted over the next couple of quarters.

Given the sharp underperformance and initial signs of a volume recovery in few categories post pricing and marketing actions, we do not expect too much downside despite this weak growth delivery in both absolute and relative terms.

Pricing should remain in the negative zone in near-term, translating to a soft revenue growth in coming quarters. We expect a gradual rural recovery led by lower inflation, low base and better farm income expectations while urban demand is expected to remain resilient especially in alternate channels.

We expect volume growth to be the sole driver for revenue growth in near-term. Gross margin improvement is expected to be invested on higher A&P and innovation spends.

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