Hindustan Unilever rating – Buy: Q4 performance was ahead of expectations

Bars of Hindustan Unilever Ltd. Lux soap are displayed for sale on a shelf at a store in Mumbai, India, on Saturday, April 27, 2013. Consumer goods maker Hiindustan Unilever is scheduled to report earnings today. Photographer: Kuni Takahashi/Bloomberg

Q4 beat expectations across revenue and profit: (i) 21% y-o-y organic domestic sales growth (underlying volume growth of 16%); (ii) Q4FY21 net sales, Ebitda, PAT rose 34.6%, 43.2%, 43.2% yoy, respectively, and were all ahead of expectations. (iii) Out-of-home and discretionary categories also returned to double-digit y-o-y growth, albeit from a low base last year. (iv) Home care revenue was up 14.6% y-o-y and segment Ebit was up 27.7%. Beauty and Personal care delivered 19.7% revenue growth and 32.5% Ebit growth. Foods and refreshment was up 96% y-o-y, (c36% y-o-y excluding GSK).

Several catalysts at work: (i) The nutrition portfolio has bounced back to strong growth and cost synergies are already ahead of HUL’s expectations. (375bp margin expansion in 2021). HUL has put in place an aggressive growth agenda, adding new formats and innovations to drive penetration, especially in rural areas. (ii) Although the second COVID-19 wave is precarious, HUL’s ecosystem is now fully geared to deal with this near-term disruption.

(iii) Inflationary trend in a few commodities has necessitated price hikes and HUL will continue to take calibrated price hikes in the coming quarter. (iv) Cost synergies, premiumisation trends, and demand normalisation in some of its high margin core categories (e.g. skin, beauty, fabric), should also aid margins. We pencil in revenue and PAT growth of 11.8% and 16.8% for FY22e.

HUL appears appealing in the current context: (i) HUL’s stock has been flat in the past year, making it the weakest performing in the consumer staples peer group. (ii) In the current volatile market context, HUL offers defensiveness, appealing valuation, and strong outlook. (iii) Growth acceleration overall and in particular for the nutrition segment will be key catalysts for stock performance. (iv) HUL remains our key structural idea within India consumer. (v) We estimate that HUL’s valuation builds in long-term earnings growth expectations of c12%, which we believe is undemanding. We marginally increase our estimates, which leads to a higher TP of Rs 3,000 (from Rs 2,900), and we maintain our Buy rating.