We interacted with the management of Hindustan Unilever (HUVR) for an update on all round industry situations. Here are the essential takeaways:
Macro atmosphere and sales channels: With many components of India progressively opening up, the management believes the effect from the second Covid wave would have peaked in May’21 and issues will progressively get improved. The outlook from Jun’21 onwards is positive, barring the emergence of a third Covid wave. The boost in shop operating hours is also a positive development. Rural continues to do improved than urban, regardless of experiencing a greater effect from the pandemic in 1QFY22 v/s last year. Prediction of a typical monsoon, great Rabi harvest, favourably timed kharif sowing, and MNREGA provide potential assistance as nicely. The modern day trade (MT) channel was impacted.
Segmental demand trends: There was a reduce quantity of pantry stocking as the availability of essentials was ensured. Preventive measures like hand washing and a focus on hygiene amongst shoppers continues to be seen. Hygiene and in-home categories (80% of HUVR’s portfolio) continue ton witness healthier demand. Demand for discretionary goods was impacted as urban and MT sales, which had normalized in 4QFY21, have been impacted from the second half of Apr’21 till the finish of May’21. The effect even though is lesser than last year. The management mentioned there would be some effect on the sales of GSKCH goods due to short-term destocking on account of distributor integration, which began at the finish of Mar’21.
Costs and margin: While there has been some softening of palm oil costs in the last two weeks, Apr’21 and May’21 continued to witness RM inflation. Crude and tea costs have risen sequentially. In the case of tea, there is hope that the new crop, due to arrive in Jul’21, will lead to a softening of costs. HUVR has taken additional value increases in soaps, detergents, home goods, and tea in 1QFY22. With some effect on discretionary demand sequentially (albeit improved than 1QFY21), additional RM inflation, and elevated marketing spends, EBITDA margin will be below stress in 1QFY22.
Valuation and view: While 1QFY22 will be impacted by the second Covid wave, the extent will be far reduce compared to last year. Rural continues to stay resilient, and demand in Health, Hygiene, and Nutrition categories remains healthier. While discretionary demand will be impacted, we anticipate the effect to be reduce YoY. EBITDA margin is probably to stay below stress owing to sequential RM inflation and greater A&P spends.
From a medium-term viewpoint, the outlook remains positive. Growth in earnings has gained additional momentum in current years (~18% EPS CAGR in the 4 years ended FY20 v/s ~12% CAGR more than the 10 years ended FY20). Despite a hugely disruptive year, HUVR posted an EPS development of 11.5% in FY21. This is specifically impressive provided the weak mid-single-digit earnings development posted by (considerably smaller sized) peers in current years.
We sustain our Buy rating with a TP of Rs 2,780 per share.