Target: ₹2,701

CMP: ₹2605.65

Hindustan Unilever’s (HUVR) Q1-FY23 print was ahead of our estimates. Given strong pricing action, domestic business grew 19.8 per cent, driven by 6 per cent volume growth. The management said with rising kitchen inflation, consumer wallet share shrank, forcing them to buy more essentials over discretionary products, more visible in rural markets.

In Q1, gross margin slipped 300 basis points to 47.4 per cent led by elevated RM/PM costs, in top-four commodities, crude oil +62 per cent, palm oil +55 per cent, plastics +20 per cent, and Soda Ash +76 per cent coupled with currency depreciation. HUVR executed further 2-3 per cent price increases to mitigate cost pressure.

The management indicated margins to moderate due to continued inflation in RM/PM, rising rupee vs dollar, increasing price vs. cost gap, and demand for value-for-money products.

The management stated that near-term growth to be price-led as inflation would continue impacting consumption. With most commodities remaining elevated and consumption of higher cost pipeline inventory, Q2 will see more inflation than Q1, and margins would remain under pressure. HUVR believes the strength of brands and robust business model will hold HUVR ahead of FMCG market growth. 

We expect gradual recovery in discretionary spends and inherent distribution strength to drive GSK-CH business; margins could remain in tight range, given inflationary cycle and high ad-spends.

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