Nomura: Subdued Q2 outlook for Hindustan Unilever with rising marketing costs

September 12, 2023 / 09:23 AM IST

Brokerage steadfast Nomura Research said successful its latest enactment that it anticipates a subdued 2nd 4th for Hindustan Unilever Ltd owed to unaltered request with minimal indications of improvement. It besides expects a important summation successful advertising while promotional expenses are expected to measurement connected EBITDA growth. Nomura said the 2nd 4th user request hasn't improved arsenic expected. Urban request is steady, driving growth, portion agrarian request is affirmative but inactive down by -3.5% connected a two-year CAGR basis. The Diwali festival successful November volition hold festive banal loading to the 3rd 4th compared to 2022, erstwhile it occurred successful the 2nd quarter.

Winter loading whitethorn besides displacement to aboriginal October from precocious September. The effects of a anemic August monsoon are inactive uncertain. The brokerage steadfast predicts a 3.5% year-on-year measurement maturation successful 2Q24, up from 3% successful 1Q24.

"We little FY24F/25F/FY26F EPS by 5% to origin successful the anemic 2Q24F outlook. We worth HUL based connected Sep-25 EPS astatine P/E of 55x (unchanged) to get astatine a revised TP of INR2,950 (vs INR3,125 previously). We support our Buy standing with a FY23-26F EPS CAGR of +11%," Nomura said successful a enactment to investors.

The brokerage steadfast said contempt terms cuts, unchangeable earthy worldly prices successful 1Q24 (with a lag effect successful 2Q) volition boost quarter-on-quarter gross nett borderline (GPM) expansion. It expects 2Q24F gross nett borderline estimates astatine 50.2%, up 440bp twelvemonth connected twelvemonth and 30bp 4th connected quarter.

Growth estimates

Nomura believes successful 2Q24, GPM enlargement volition continue, but HUL is expected to reinvest it successful advertizing and promotion (A&P) to boost volumes. The beingness of local/small players whitethorn pb to precocious media spending. Nomura forecasts a 50% year-on-year maturation successful A&P successful 2Q24, limiting OPM expansion. Nomura's 2Q24 operating nett borderline (OPM) estimation is 23.1%, up 20 ground points year-on-year and down 20 ground points quarter-on-quarter. Its EBITDA maturation estimation is astir 4% year-on-year, a alteration from the earlier prediction of early-teens growth.

"We expect HUL to beryllium a cardinal beneficiary arsenic request starts to recover. Despite rising contention we judge it has 1 of the amended arsenals vs peers to thrust margins. Its valuations are present 1-SD beneath its 3/5-year trading average, indicating tenable valuations. Key risk: dilatory measurement growth," Nomura said successful its note.

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