Hindustan Unilever Limited

While the company’s product portfolio and availability through various retail channels is undoubtedly impressive, the increasing competition posed by start-ups in the organised sector and the tendency of young consumers to try out various brands instead of displaying single brand loyalty is an issue of concern when it comes to future growth prospects.

Hindustan Unilever Limited (HUL) stands as India’s foremost fast moving consumer goods (FMCG) company, boasting a rich 90-year heritage. The company is driven by a purpose to foster sustainable living, evident in its extensive portfolio of over 50 brands across 16 FMCG categories. Remarkably, nine out of 10 Indian households rely on HUL brands for their everyday needs, enhancing their quality of life. With an annual production exceeding 65 billion units, HUL ensures widespread availability through a vast network of nine million retail outlets and numerous digital commerce platforms, reaching millions of consumers nationwide.

Guided by its compass business strategy, HUL integrates sustainability across its operations, prioritising consistent, competitive, profitable, and responsible growth. HUL functions within three primary FMCG categories: beauty and personal care, home care, and foods and refreshments. Within each category, there are specialised sub-segments targeting specific niches, each housing multiple brands tailored to those particular niches.

As a subsidiary of Unilever, a global leader in food, home care, personal care and refreshment products, with a presence in over 190 countries, HUL maintains its status as India’s top-rated ESG-focused FMCG company and a preferred employer across various sectors. Amidst a rapidly evolving landscape, HUL remains steadfast in its purpose-driven journey, adapting to meet future demands while upholding its core values.

Additionally, starting from April 1, 2024, the beauty and personal care division has been split into two separate units: beauty and wellbeing and personal care. The beauty and wellbeing unit encompasses skin care, premium beauty, hair care, colour cosmetics, and health and wellbeing segments. Conversely, the personal care unit consists of skin cleansing, oral care and deodorant categories.

Product and Location Revenue Breakup

Sector Overview
The FMCG sector in India has experienced significant growth driven by consumer demand and higher product prices, particularly for essential items. Employing around 3 million people, it contributes approximately 5 per cent to India’s total factory employment. Anticipated sales growth of 7-9 per cent by revenue in 2022-23 is propelled by favourable government policies, a burgeoning rural market, youthful population, new branded products, and the expansion of e-commerce platforms. Resilience in various aspects like manufacturing, operations, retail, logistics and consumer communication is vital for sustained growth.

India’s FMCG sector, the fourth-largest in the country, has seen robust expansion due to rising disposable incomes, youthful demographics and increasing brand awareness. Household and personal care products account for 50 per cent of FMCG sales, making it a significant contributor to India’s GDP. The country’s large middle-class population, surpassing that of the US, presents an irresistible market for FMCG companies, especially as economic benefits reach more people, supported by a median age of 27 and government initiatives for financial inclusion and social safety nets.

The FMCG market in India reached USD 167 billion in 2023, with expected revenue growth at a CAGR of 27.9 per cent through 2021-27, reaching nearly USD 615.87 billion. The processed food market is also on an upward trajectory, forecasted to reach USD 470 billion by 2025. Established FMCG giants face competition from D2C-focused start-ups like Mamaearth and Sugar, indicating a shift in market dynamics.

Rural consumption is on the rise, driven by increasing income and aspirations, with a growing demand for branded products. As the unorganised sector’s share diminishes, organised sector growth is expected to accelerate, aided by growing brand consciousness and modern retail. Online platforms play a crucial role in reaching hinterlands, with e-commerce expected to capture an 11 per cent share of the total FMCG sales by 2030, facilitated by India’s growing internet user base.

Financial Overview
Hindustan Unilever Ltd. boasts a market capitalisation of ₹5,32,946 crore. The promoters currently hold about 61.90 per cent of the shares, while FIIs and DIIs possess around 13.65 per cent and 12.31 per cent of the shares, respectively. The free float of the company is at 12.11 per cent. Looking at the quarterly financial performance of Hindustan Unilever on a consolidated basis, in Q3FY24 the company reported revenue of ₹15,597 crore which marginally increased by 0.19 per cent as against to ₹15,567 crore in Q3FY23, while the EBITDA of the company also slightly surged by 0.79 per cent and stood at ₹3,694 crore as against ₹3,665 crore in Q3FY23.

The net profit of the company declined by 1.08 per cent to ₹2,481 crore as compared to ₹2,508 crore in Q3FY23. Additionally, its EBITDA margins in Q3FY24 remained healthy at 23.7 per cent which improved by 10 bps as compared to Q3FY23. In Q3FY24, HUL exhibited a decent performance, demonstrating resilience with an underlying volume growth (UVG) of 2 per cent. Notably, its key segments such as home care and beauty and personal care, accounting for approximately 75 per cent of their business, sustained volume recovery with mid-single-digit UVG rates.

Further, the foods and refreshment segment experienced a slight decline in UVG, primarily attributed to pricing adjustments made during the year to counteract the impact of rising commodity costs. As a result, the underlying sales growth (USG) remained unchanged, reflecting the influence of price reductions. Looking at the previous three quarters’ financial performance of Hindustan Unilever on a consolidated basis, in 9MFY24 the revenue of the company stood at ₹45,365 crore which declined by 2.83 per cent as compared to ₹46,686 crore in 9MFY23, while the EBITDA of the company also plunged by 4.94 per cent to ₹10,575 crore as against ₹11,124 crore in 9MFY23.

Similarly, the net profit of the company also plummeted by 2.32 per cent to ₹7,542 crore as compared to ₹7,721 crore in 9MFY23. Further, looking at the company’s financial position in terms of liquidity and solvency, it becomes apparent that the interest coverage ratio stands at a healthy 55.2 times, the current ratio at 1.56 and the debt-to-equity ratio at 0.03. These ratios signify the company’s low debt levels and its healthy capacity to readily fulfil interest obligations. Overall, these indicators paint a picture of a great financial position concerning liquidity and solvency. Additionally, in evaluating performance metrics, the return on equity (ROE) is at 20.5 per cent, while the return on capital employed (ROCE) currently stands at 26.6 per cent.

Outlook
Hindustan Unilever will continue to focus on improving gross margins through net revenue management, digital acceleration, cost competitiveness and premiumisation. This will help HUL invest in brand-building, innovation, market development and other strategic priorities. The management expects a gradual recovery in demand due to increased government spending, recovery in winter crop sowing, and better crop realisations. Considering stable commodity prices, the management expects price growth to be marginally negative in Q4FY24.

Furthermore, looking at the key valuation metrics, the company’s price to earnings (PE) ratio is at 51.6 times, which is substantially lower than its five-year historical median PE of 64.8 times and also slightly below its industry median of 55.5 times. Moreover, the price to sales is at 8.6 times which is also below its five-year historical median of 10.8 times and also below its industry median price to sales of 10.75 times. Additionally, the PEG ratio stands at 3.63.

Lastly, even though the company seems pretty attractive on a relative valuation basis there are also other things that oneshould look for as to why the company is trading below its historical median multiples. There might be multiple reasons behind that, some of which are that HUL is currently facing intense competition, which a majority of the large companies are also facing in the FMCG sector due to low barriers to entry. Also, as an increasing number of start-ups are coming up catering to niche segments in the FMCG industry, the market share of HUL might decrease as consumers have become more okay than ever with trying out new products from new brands.

ROCE Percentage Trend (FY12- FY24)

Moreover, the less stickiness of Gen Z to brands unlike the previous generation is really a concern for HUL. It also seems that the company is not being able to generate great returns on capital as it once used to in the earlier days, which can also be the reason for the current valuation while the decline in ROCE can be attributed to the increased competition. Hence, due to uncertainty regarding growth, increased competition and declining returns on capital, we recommend AVOID.