HUL for short-term growing pains

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Hindustan Unilever Ltd (HUL) reiterated its growth strategy on Capital Markets Day 2022. After a hiatus of about three years due to the pandemic, the fast-moving consumer goods (FMCG) giant held a meeting on Friday offline analysts.

Company management has emphasized that there is significant room for long-term growth. Favorable demographics, urbanization and low penetration of several FMCG categories are some of the macro factors that can help drive growth. India’s low per capita consumption of FMCGs compared to other developing countries provides ample scope for growth. Overall, HUL expects double-digit earnings per share growth over the long term.

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One of his focus areas would be to grow the core portfolio through premium products and targeted communications. As part of HUL’s WiMI (Winning in Many Indias) strategy, the company has organized regional portfolios in various categories to drive penetration and market share gains from its regional rivals.

Other growth strategies include market development and premiumization. Premiumization has been a key growth driver for HUL and the portfolio now represents around 33% of the product mix. This metric was approximately 22% in fiscal 2012. According to management, much of the approximately 1,000 basis point (bps) EBITDA margin expansion seen over the past decade is due to premiumization. One basis point equals 0.01%. Ebitda is earnings before interest, taxes, depreciation and amortization. In the beauty and personal care (BPC) segment, HUL intends to grow the premium segment by twice the market. The company is also looking to quadruple its e-commerce channel in BPC relative to market growth.

Additionally, the company is stepping up its digital push. HUL’s digitized demand capture currently stands at more than 25% compared to zero a decade ago. Its e-B2B Shikhar app has grown rapidly and is now used by over a million stores.

“HUL has evolved into an interconnected ecosystem powered by data analytics, artificial intelligence, machine learning, and predictive decision-making tools. We believe these moves make HUL the most “futuristic” to win the next decade,” Nomura Global Markets Research said in a Nov. 21 report.

While this is encouraging, the near-term trajectory is challenging on both the demand and margin fronts. “The long-term opportunities notwithstanding, there are short-term concerns,” Jefferies India analysts said in a Nov. 19 report. However, gross margin is expected to recover sequentially in H2FY23 although a portion will be reinvested,” they added.

During the September quarter (Q2), HUL experienced a strong year-over-year decline of 580 basis points in gross margin to 45.8%. Gross margin in the second quarter was at its lowest in several years. Thus, the extent of the recovery in margins depends on the easing of inflation trends. Weak demand in the rural market is another concern. These factors are expected to weigh on HUL’s earnings for the foreseeable future.

“Given the near-term challenges for all commodities, we are reducing HUL’s target price/earnings multiples to 55x from 60x (based on estimated September 2024 earnings per share),” Motilal analysts said. Oswal Financial Services. year, HUL shares gained 4%, slightly more than the Nifty50 index, which rose 2%. Better volume growth would improve sentiment for the stock. If global commodity prices and inflation continue to moderate, volume growth could accelerate .

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