Hindustan Unilever Share Price: Tea, soap, oil to detergent, HUL focusses on volume growth

A potential change in stance at HUL in favour of volume growth could be a key driver for HUL share outperformance in CY2021. ICICI Securities note that this strategy has already started playing out in tea (price hike lower than competition and commodity inflation), soaps (price hikes lower than competition despite steep input inflation (palm prices up over 30% in 6M) and detergents. In India, a “growth market”, investors tend to (rightly) ignore short-term profit sacrifice, provided the trajectory of volume outperformance is clear (as it’s DCF-accretive).

ICICI Securities are amending their FMCG portfolio strategy recommendation of Godrej Consumer, Marico, Dabur, Tata Consumer over HUL (post HUL’s 26% underperformance (versus Nifty) over the last 6 months). 

ADD: Retained.

HUL’s comment in Q2 FY21 call, management said that the right thing for them to do is to focus on competitive volume-led growth. And if it means that some of the margin expansion is not at the desired levels or the levels they would like to be, it is absolutely okay with them. Management will invest to drive growth.

Focus on volume growth, even at the cost of margin pointing to a trajectory change:

ICICI Securities believes that HUL is likely at the cusp of a period of volume growth acceleration, even if that means sacrificing gross margins to an extent. ICICI Securities note HUL’s comments in Q2 FY21 earnings call stating the change in thought process. This strategy is already playing out in tea and soaps, where HUL has taken a much lower price hike versus competition and versus commodity inflation, in a bid to gain market share. Even in detergents, HUL has been quick in passing input cost benefits, again ahead of competition.

Revenue growth could accelerate while peers are likely to decelerate in FY22:

ICICI Securities note that HUL’s revenue growth in FY22 could accelerate, given a weak base of FY21, while peers are likely to witness moderating growth in FY22. Having said that, ICICI Securities do believe consensus should consider 2-year CAGR while comparing the performance in FY22 (adjusting for base effect of FY21).

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Valuation and risks:

HUL earnings estimates are largely unchanged; modelling revenue / EBITDA / PAT CAGR of 12 / 16 / 19 (%) over FY2020-22E. ICICI Securities maintains ADD rating with DCF-based unchanged target price of Rs 2400. Key downside risks are delayed recovery in demand and irrational competition.