EQUITY RESEARCH: HINDUSTAN UNILEVER LIMITED

With over 50 brands spread across 15 different categories, the company offers a wide range of products, including fabric solutions, home & hygiene, life necessities, skincare, cosmetics, hair care, oral care, deodorants, tea, coffee, ice cream & frozen desserts, meals, and health food drinks (HFD).

HINDUSTAN UNILEVER LIMITED

ABOUT THE COMPANY

• HUL is India’s largest FMCG company and has a diverse product portfolio, including soaps and detergents, personal care products, and food and beverages. The company has owned factories and many outsourced production facilities across the country.
• With over 50 brands spread across 15 different categories, the company offers a wide range of products, including fabric solutions, home & hygiene, life necessities, skincare, cosmetics, hair care, oral care, deodorants, tea, coffee, ice cream & frozen desserts, meals, and health food drinks (HFD). Some of its well-known brands include Pond's, Vaseline, Clinic Plus, Sunsilk, Indulekha, Lakme, Pepsodent, Axe, Brooke Bond, BRU, Kwality Wall's, Knorr, Kisan, and others.
• In the 1990s, HUL opted for growth through acquisitions. In 1998, group company Pond's India Ltd was merged with HUL. The company also acquired the Lakme brand, its factories, and 50% stake of Lakme Ltd in Lakme Lever Ltd in 2008. In April 2016, HUL acquired Kerala-based hair oil brand, Indulekha, for Rs 330 crore. Indulekha has a strong presence in Kerala, Tamil Nadu, Karnataka, and Maharashtra. HUL has bridged the gap in its product portfolio through a series of acquisitions in the past, such as Aditya Milk (2018), GSKCH (2020), and VWash (2020).
• Over the nine months ended December 2021, HUL reported a PAT of Rs 6,585 crore on an operating income of Rs 38,679 crore as against Rs 5,809 crore on Rs 34,595 crore, respectively, for the corresponding period of the previous fiscal.

SHAREHOLDING PATTERN:

The promoter held a 61.90% share. From 13.30% in Q1 FY23 to 14.05% in Q2 FY23, FII increased its shareholding. In Q2 FY23, DII's stake dropped from 12.20% in Q1 FY23 to 11.76%.

MANAGEMENT COMMENTARY:

Sanjiv Mehta, CEO, and Managing Director commented “Sustaining our strong momentum, we had yet another quarter of solid all-round performance delivering double-digit revenue and earnings growth. Our consistent performance is reflective of our strategic clarity, the strength of our brands, excellence in execution, and dynamic financial management. I am excited about our foray into the fast-evolving ‘Health and Wellbeing’ category through our strategic partnerships with OZiva and Wellbeing Nutrition. Our sustainable community development initiative ‘Prabhat’ turned 9 this year. Through Prabhat, we have made a positive difference to nearly 9 million people in the communities around our factories and depots. Looking forward, we are cautiously optimistic in the near term and believe that the worst of inflation is behind us. This should aid in a gradual recovery of consumer demand. We remain focused on managing our business with agility and continue growing our consumer franchise whilst maintaining margins in a healthy range. We stay confident of the medium to the long-term potential of the Indian FMCG sector and HUL’s ability to deliver Consistent, Competitive, Profitable, and Responsible growth."

SECTOR POTENTIAL

• The FMCG industry reported price-led growth of 8.9% QoQ in the second quarter of FY23, although volumes fell by 0.9%.
• The total FMCG segment, which comprises 35% of rural markets, continued to experience a decline. Rural markets experienced a volume decline of 3.6% in Q2 FY23 versus a decline of 2.4% in Q1 FY23. Double-digit price hikes and slower unit growth continue to be the main drivers of the demand drop in rural markets.
• Urban markets saw a volume gain of 1.2% QoQ in Q2 FY23. The food segment's 3.2% volume gain was the driving force behind the expansion, while the non-food segment posted a 3.6% QoQ volume fall.
• According to Nielsen IQ, modern trade channels like malls, supermarkets, and hypermarkets experienced double-digit volume and value increases of 11% and 22.2%, respectively, during the quarter. The traditional trading channels, meanwhile, recorded a 2% YoY volume reduction.
• The channel mix will drastically change in the future in favor of e-commerce. The supply and distribution channels of FMCG industries are being optimized through digitalization.
• The government's PLI (Production-Linked Incentive) scheme, which has a budget of ₹10,900cr, should provide businesses with a significant opportunity to increase exports.
• The sector believes that because few commodities, particularly palm oil prices, have recovered from their decadal-high levels, margins are anticipated to see an improvement in the upcoming quarters.
• The effects of the most recent increase in the import duty on RBD (refined, bleached, and deodorized) and CPO (crude palm oil) can still be observed.

SEGMENT:

Homecare segment:

Delivered 32% revenue growth and double-digit volume growth in Q3 FY23. Both Fabric Wash and Household Care grew in high double-digits. The liquid portfolio continued to deliver strong results driven by effective market development actions. Calibrated price increases were taken in Fabric Wash and Household Care portfolios to partly offset the input cost inflation.

1. Fabric Wash: High double-digit growth with robust performance across brands and formats. Double-digit volume growth.
   ▪ Handsome market share gains continue in both value and volume.
2. Household Care: Grew in high double-digit with a strong performance in both dishwasher and surface cleaning. High-teens volume growth.

Beauty and Personal Care segment:

Grew 10% YoY in Q3 FY23. Skin Cleansing delivered double-digit growth with volumes growing in the mid-single digits. With softening in Palm Oil, price reductions were taken in the soap portfolio. Food and Refreshment segment: delivered 7% growth YoY in Q3 FY23, led by robust performance in Foods, Coffee, and Ice-cream. Foods grew in the high teens with double-digit volume growth. Tea continued its value and volume market leadership and delivered mid-single digits.

1. Skin Cleansing: Strong double-digit growth, broad-based across the portfolio, volumes grew in the mid-single digit. With softening in Palm Oil, price reductions were taken in the soap portfolio. Market development actions in body wash yielding good results.
2. Hair Care: High single-digit growth led by strong performance in Clinic Plus. Innovations and future formats continue to gain consumer relevance.
3. Skin Care and Color Cosmetics: Delayed winter impacts performance; double-digit growth in the non-winter portfolio. Continued focus on innovations & market development actions in emerging/ on-trend demand spaces.
4. Oral Care: Steady performance driven by Closeup.

Homecare segment:

Delivered 32% revenue growth and double-digit volume growth in Q3 FY23. Both Fabric Wash and Household Care grew in high double-digits. The liquid portfolio continued to deliver strong results driven by effective market development actions. Calibrated price increases were taken in Fabric Wash and Household Care portfolios to partly offset the input cost inflation.

1. Beverages: Continued value and volume market leadership in Tea. The business grew volumes in the mid-single digits, price cuts soften overall value growth. Coffee continues to perform well delivering double-digit growth.
2. Health Food Drinks: Grew in mid-single digits with a strong performance in Boost and Plus range. Market share and penetration gains continue on the back of focused market development actions. The market remains subdued due to the impact of inflation.
3. Foods: Volume led to high teen growth driven by strong performance in Ketchup, Jams, and Unilever Food Solutions (UFS).
4. Ice Cream: Continues to perform well and delivered double-digit growth.

KEY AREAS:

• Leading market position across categories in the FMCG industry: HUL is the largest FMCG company in India with market leadership across product segments. The company has 14 brands with over Rs 1,000 crore in annual sales. In terms of market share, its brands hold the top two spots in most categories it has a presence. The product portfolio includes home care (31% revenue contribution in fiscal 2021), beauty and personal care products (40%), and foods and refreshments (29%). The brands of HUL have high visibility and have sustained their leadership over decades, backed by an extensive distribution network and strong advertising and marketing support. HUL has been leveraging its distribution strengths to adapt its channel strategy for its products and market segments. The synergies from the GlaxoSmithKline Consumer Healthcare Ltd (GSK CH) merger (assets of the Horlicks brand and intellectual property rights of brands such as Boost, Maltova, and Viva) will enhance the market position of HUL in the foods and refreshment segment and will increase revenue diversity in the medium term. The company plans to increase the penetration of Boost and Horlicks in rural regions, for which it has launched smaller stock-keeping units. The strong innovation and premiumization strategy of HUL along with the benefit of integration of the nutrition business will drive healthy growth and sustenance of the market position in the medium term.
• Healthy operating efficiency: HUL has high operating efficiency because of its strong distribution network, geographically diversified production facilities, and strong linkages with the parent, Unilever Plc (Unilever; rated ‘A+/Stable/A-1' by S&P Global Ratings). Owing to a healthy mix of owned factories and outsourced production facilities across the country, HUL saves significantly on freight cost. The supply chain has been strengthened by cost-saving and inventory man
• It has got permission for the PLI (Production Linked Incentive) scheme under the two categories of processed fruits and vegetables and ready-to-cook/ready-to-eat. Products like ice cream, ketchup, jam, soups, mayonnaise, etc. are included in it. This will be included in other operating income as reported.
• The continued adoption of its B2B (business to business) e-distribution platform Shikhar by retailers will aid in strengthening its general trade channel. More than 9,50,000 retail outlets have signed up on the Shikhar app.
• Entry into the Health & well-being area: Hindustan Unilever Ltd. has made two investments in Zywie Ventures Pvt. Ltd. and Nutritionalab Pvt. Ltd., entering the health and wellbeing segment. These tactical purchases will allow it to enter the quickly expanding health and wellness business, which the company estimates to have a potential value of 30,000 crores.

1. Zywie Ventures Private Limited: It will acquire a 100% equity stake in Zywie Ventures Private Limited and also indirectly and proportionately acquire Zenherb Labs Pvt. Ltd. (its wholly owned subsidiary). The purchase of shares from its existing shareholders will be done in two tranches. • In the first tranche it will acquire 51% for a cash consideration of ₹264.28 cr on or before 2 nd January 2023. And will acquire the next 49% in the second tranche at the expiry of 3 years from the date of completion of the first tranche. The consideration for the acquisition of the second tranche will be determined at the end of three years. The company is involved in manufacturing, buying, selling, trading, and dealing in protein products, vitamins, minerals & supplements; and beauty & personal care. It primarily sells its products in India.
2. Nutritionalab Private Limited: HUL will acquire 19.8% of the company for a cash consideration of ₹70 cr. The company is involved in manufacturing, buying, selling, trading, and dealing in vitamins, minerals & supplements, and protein products. • The transaction is expected to be completed on or before 23rd January 2023.

FINANCIALS:

• Q3FY23: For Q3FY23, HUVR reported revenue of INR 1,55,970 mn (+16.1% YoY/ +3.0% QoQ). The underlying volume growth during the quarter was 5.0% YoY. The growth in Home Care segment continued to be strong at 31.5% YoY/7.2% QoQ. The Beauty & personal care segment continued to have double-digit growth at 10.6% YoY (+3.0% QoQ), despite impact of delayed winter in skin care. The Food and Refreshment segment grew by 6.8% YoY but declined by 1.5% QoQ. The relevant market for HUVR grew by 8.0% YoY in Q3FY23 while volumes continued to decline. Urban markets continued to lead the growth. However, rural is seeing some improvement and had higher YoY value growth vs. Q2FY23. 
• SALES GROWTH: Net sales increased by 11.5% YoY in FY22 to ₹52,446cr, while volume increased by 3% YoY. Net sales increased by 18% YoY to 29,768cr in the first half of FY23. It kept expanding in terms of value and market share. All the categories had an increase in income. The main future revenue sources will be product innovation, growth in the discretionary and out-of-home markets, and increased market share in important industries. Its continued emphasis is on premiumization, regionalization, and growing its core business faster than the competition. The overall demand situation, however, was nevertheless impacted by the slowing of rural growth and muted consumer sentiment.
• EBITDA GROWTH: In FY22, EBITDA increased by 10.6% YoY to ₹12,857 cr. EBITDA increased by 12% YoY to ₹6,881cr in the first half of FY23. According to the management, preserving operating profitability has been aided by a focus on calibrated pricing increases combined with cost-saving measures. The EBITDA margin fell by 34 bps year over year in FY22 to 22.52%. EBITDA margin was 23.12% in H1 FY23, down 123 bps year over year. Except for palm oil, practically all commodity prices remained higher during the period. The consumption of merchandise with a higher cost and increased spending on promotional activities both had an impact on the margin growth. According to the management, the NMI (net material inflation) is expected to be slightly lower on a sequential basis but may continue to be much higher on an annual basis. Additionally, it wants to spend more on advertising and promotions.
• PAT GROWTH: In FY22, PAT increased by 11.1% YoY to ₹8,887 cr. Profit growth that was adjusted was 8% YoY. PAT increased by 18% YoY to ₹5,061cr in the first half of FY23. During that time, adjusted PAT growth was 18% YoY. The extraordinary items include costs associated with restructuring, costs associated with purchase and disposal, and profit from the sale of surplus properties. PAT margin only slightly increased (7 bps YoY) in FY22. PAT margins were 17% in H1 FY23, a small increase of 3 bps year over year. The adjusted PAT margin increased by 5 bps year over year.
• CASH FLOWS: Due to working capital adjustments, the company generated $9,048 cr from operations in FY22 as opposed to ₹9,163cr in FY21.  A total of ₹1,728cr in cash from investing operations was spent on the purchase of property, plant, and equipment as well as ongoing investments. ₹8,015 crore in cash from financing activities was used, primarily due to greater dividend payments.
• DEBT TO EQUITY: Since a long time ago, the corporation has had no debt. Total debt was ₹105cr as of September 30, 2022, and it was all short-term debt.

VALUATION & ANALYST COMMENT:

For the overall FMCG industry, the pressures in the operating environment are easing gradually due to commodity inflation coming off from the peak and likely bottoming out of a rural slowdown. HUVR has continued to grow ahead of the market even in the difficult macro environment and will benefit as the situation eases. 

Net operating cash accrual was healthy at Rs 261 crore in fiscal 2021 owing to the high dividends paid during the fiscal. Net cash annually is expected to remain healthy in the absence of any debt obligation. The bank limit remained unutilized, and the company had liquid funds of Rs 7,178 crore in mutual funds, bank deposits, bonds, and debentures as on March 31, 2021. 

The TTM PE multiple for Hindustan Unilever is currently 66.28x. Its position as a market leader in the FMCG sector across all categories, strong brands, stable financial risk profile, product innovation, and great operational efficiency provides the company an advantage over rival businesses.

The business has a zealous dividend pay-out strategy and has declared dividends consistently every year. 90% was the dividend distribution percentage for FY22. The annual average equity dividend was ₹34 per share. It announced an interim dividend of ₹17 per share at that time

HUL has been in a structural upswing ever since it surpassed its ₹325 all-time high in 2011 and broke through. Since that time, there has been no turning back, and the stock has steadily risen. It reached a lifetime high of₹2589 in September 2021; since then, there has been considerable profit booking. . We expect Revenue to grow by 13% CAGR over FY22-25E. A target price of INR 3,100. We assign "BUY" rating.

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