Hindustan Unilever Ltd (HUL) has been struggling with muted revenue growth for the past few quarters, thanks to a combination of weak pricing and subdued volume growth. Demand conditions are still not particularly exciting, with urban demand moderating even as rural is recovering.
At its recent capital markets day meeting, HUL’s management indicated that it foresees overall demand trends to be stable in the short term. The company expects low single-digit price growth in the near term if commodity prices remain where they are. Here, commodity price volatility, especially in tea and palm oil, is a challenge.
HUL intends to focus on volume-led revenue growth and expects to maintain Ebitda margin at current levels in the near future. Its Ebitda margin for the six months ending September (H1FY25) stood at 23.5%. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
HUL has made sharper portfolio choices through Pureit divestment and ice cream business demerger as these have lower synergies with the company.
“We believe some of the headwinds HUL faced in FY24 and H1FY25 were temporary. We believe the narrative will turn positive in H2FY25 as price deflation will be behind,” said a BNP Paribas Securities report. HUL is also touted as a key beneficiary of a recovery in rural growth.
Long-term goal
At the meeting, the management shared its key long-term aspiration of clocking double-digit earnings per share (EPS) growth, primarily via revenue growth and modest margin expansion. Growth would be driven by volume growth of 100 basis points more than the industry average, premiumization and portfolio transformation in the beauty and well-being (B&W) and foods businesses.
“From a long-term perspective, HUL may be able to record close to 10% EPS annual growth. However, a slightly higher EPS growth, say in the mid-teens, would need faster revenue growth, which is difficult to achieve,” said Kunal Vora, head of research at BNP Paribas.
Over FY14-24, HUL’s revenue compound annual growth rate (CAGR) was about 8%, while Ebitda was at 12%, led by premiumization and cost-saving initiatives.
That said, HUL is taking several steps to strengthen its beauty portfolio by targeting affluent and aspiring consumers. It intends to make disproportionate investments to build six high-growth segments, including face cleansing, light moisturizer and suncare.
Overall, the company’s core portfolio, which accounts for less than 50% of sales, is expected to grow in line with market growth. Growth in the future core, which includes 10 sizeable brands, is estimated at 1.25x market. Lastly, market makers, a small but fast-growing category, is estimated to grow at 1.5x market growth. HUL expects more than 80% of growth to be driven by the future core and market makers combined.
Going ahead, Axis Securities expects HUL’s sales, Ebitda, and profit after tax CAGR to be 7%, 8%, and 8%, respectively, over FY24-27. HUL’s shares have fallen by almost 7% in 2024 so far in the backdrop of muted growth, underperforming the Nifty 50 and Nifty FMCG indices. The stock trades at 49x FY26 estimated earnings, according to Bloomberg data. Growth is the key variable that would decide the stock’s future course.
“Given that the company is doing the right things, and the single-minded focus on growth, we upgrade to Buy (rating) from Add. However, near-term growth could be subdued due to weak macro (although still improving); hence, investors may need to keep a medium-term investment horizon,” said analysts from IIFL Securities in a report on 2 December.
However, when growth does come through, IIFL’s analysts believe price-to-earnings multiple expansion is on the cards.
