Hindustan Unilever growth improves as input inflation and Home Care competition pressure margins

Investment View and Valuation

PL Research retained its Accumulate rating on Hindustan Unilever after the company’s Q1 FY27 results, while reducing its DCF-based target price to Rs 2,320 from Rs 2,454. PL cut its FY27E and FY28E EPS estimates by 1.9% and 1.2%, respectively.

The estimate revision reflects lower-than-expected volume growth, input-cost pressure in soaps and tea, competition and crude-related margin pressure in Home Care, and an expected recovery in advertising and promotion expenditure after a low base in Q1 FY27. PL expects HUL to deliver sales and PAT CAGRs of 9% and 8.7%, respectively, over FY26 to FY28. The broker noted that the share traded at 39.6 times FY28E EPS.

Q1 FY27 Financial Performance

Hindustan Unilever reported consolidated volume growth of 5% in Q1 FY27, while standalone volume growth was about 4%. Consolidated revenue increased 9.8% year-on-year to Rs 1,66,570 million, below PL’s estimate of Rs 1,71,258 million.

EBITDA was 1.3% below PL’s estimate, although the EBITDA margin was 30 basis points above the broker’s estimate. Adjusted PAT was broadly in line with PL’s estimate of Rs 26,892 million.

Segment Performance

Home Care: Revenue growth was led by high-single-digit fabric-care volume growth. The liquids portfolio continued to grow at a double-digit rate, with Vim liquid recording double-digit household-care growth. PL believes competitive pressure in Home Care is likely to persist over the coming quarters.

Personal Care: Premium bars supported mid-single-digit skin-cleansing growth, body wash maintained double-digit growth, and Closeup and Pepsodent innovations supported mid-single-digit oral-care growth.

Beauty and Wellbeing: Hair care recorded double-digit growth and strengthened market leadership. Premium skin care helped skin care and cosmetics grow at a high-single-digit rate. Minimalist delivered double-digit growth, although Oziva was under pressure due to distribution realignment.

Foods and Refreshment: Coffee and lifestyle nutrition grew at double-digit rates, packaged foods grew at a high-single-digit rate, and tea delivered low-single-digit volume growth.

Management Commentary and Growth Opportunities

Management said HUL had reached new market-share highs in laundry and hair care. It highlighted five quarters of strong lifestyle-nutrition growth, a volume step-up in the segment, and Boost reaching an annualised revenue run rate of Rs 10,000 million. Management sees substantial opportunity in health supplements, including Horlicks protein launches.

• Both rural and urban markets have shown healthy growth, with a recent step-up in urban demand.
• Quick commerce is evolving rapidly and growing at 30% to 40%.
• Q1 FY27 inflation was around 10%, while price hikes were around 5%. Management said calibrated price increases would be aligned with inflation.
• HUL expects to maintain its guided EBITDA-margin band if Brent crude remains in the US$75 to US$100 range.

Key Risks and Offsetting Drivers

PL identifies 8% to 10% raw-material inflation as a near-term concern. Further crude-price increases and a possible rise in palm-oil prices due to El Nino could pressure margins over the next two to three quarters.

Offsetting drivers in PL’s thesis include calibrated pricing, healthy rural and urban demand, premiumisation, innovation, new channels, and continued traction in Beauty and Wellbeing and Nutrition.