Stock Update

Hindustan Unilever Ltd

Steady leadership in core biz to power earnings
Powered by the Sharekhan 3R Research Philosophy Consumer Goods Sharekhan code: HINDUNILVR
Reco/View: Buy  CMP: Rs. 2,528 Price Target: Rs. 2,850 

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3R MATRIX + = -
Right Sector (RS) ü á Upgrade  Maintain â Downgrade

Right Quality (RQ) ü Summary

Right Valuation (RV) ü Š We maintain a Buy rating on Hindustan Unilever Ltd (HUL) with an unchanged PT of Rs. 2,850.
Leadership position in 80% of portfolio, improving growth outlook and a healthy balance sheet
+ Positive = Neutral – Negative with consistent cash flows makes it a best pick in FMCG space. Stock trades at 59.0x/48.9x its
FY2023E/24E EPS.
Š Driving growth in core categories through premiumisation, market development through new
What has changed in 3R MATRIX launches, cluster-based approach through WIMI strategy and expansion of distribution network
remain key growth drivers. Revenues to clock CAGR of 14% over FY2022-24.
Old New Š Consistent fall in key input prices (palm oil prices corrected by 50% from highs) and price hikes
will help margins improve from H2FY2023.
RS  Š Balance sheet stays strong on steady fall in working capital days (by 12 days in FY2022) and
consistent improvement in cash flows and higher dividend payout (90% in FY2022).
RQ 
Hindustan Unilever (HUL) registered resilient numbers in FY2022 as revenues grew by 11% y-o-y (volumes
RV  rose by 3%) and PAT rose by 9% y-o-y despite headwinds such as pandemic-led uncertainties, inflationary
effects on rural demand and a surge in input prices in H2FY22. The management is focusing on achieving
double-digit earnings growth in the medium to long run led by strategies such as developing the product
basket, lead in the channel of future and building differentiated structures and capabilities in the coming
ESG Disclosure Score NEW years. The Indian consumption market’s structural growth story is intact with low per capita consumption
and low penetration in most categories and improving rural demand for branded products that offer
ESG RISK RATING ample opportunities. HUL is focusing on converting opportunities in growth through growing the core
Updated Jul 08, 2022
25.80 premiumisation, market development and a cluster-based approach. Such a move will also be supported
by a healthy balance sheet, consistent improvement in the cash flows that supports core businesses to
Medium Risk drive consistent growth.
Š Well-defined strategies for each category to drive consistent growth: HUL is the leader in 80% of its
NEGL LOW MED HIGH SEVERE
product portfolio with an excellent product development strategy and strong distribution backing. More
0-10 10-20 20-30 30-40 40+ than 75% of products gained volume and value market share in FY2022. HUL’s 16 brands garner revenues
Source: Morningstar of more than Rs. 1,000 crore, while two brands have revenues of above Rs. 5,000 crore. Key business
categories have well-defined growth strategies - Beauty & Personal care (BPC) focusing on building
differentiated and purposeful products under core brands and playing on naturals, home care (HC)
Company details focusing on automation of laundry and large opportunities in surfaces provided by pandemic and food &
beverages (F&B) focusing on building a nutrition portfolio to reduce India’s protein deficiency and scale
Market cap: Rs. 5,93,977 cr up in the North & West. It aided key businesses categories to perform well in the tough environment.
52-week high/low: Rs. 2,859 / 1,902 Š Aiming for double-digit earnings growth: Despite tough demand scenario and inflationary headwinds,
HUL’s PAT grew at CAGR of 13% over FY2020-22 (with revenues growing by ~15%, OPM standing at
NSE volume: 24%). The company has maintained its thrust on achieving double-digit earnings growth by achieving
18.6 lakh sustained volume growth in the core categories of home care and personal care, scaling up the foods &
(No of shares) refreshment business and a gradual improvement in OPM. We expect HUL’s revenues and PAT to clock a
CAGR of 14.5% & 17% over FY2021-24 with expected improvement in the volume growth (from H2FY2023)
BSE code: 500696 led by recovery in consumer demand and consistent market share gains in the key portfolio.
NSE code: HINDUNILVR Š Raw material pressure under control; OPM to be at 25% in FY2024: Prices of some key inputs such as
palm oil and crude oil derivatives (such LAB and packaging material) corrected from its high in past two-
Free float: three months. Palm oil prices are down by 50% from its high in April 2022, LAB prices are down by ~6-8%,
89.5 cr while reduction in the packaging cost is due to fall in the crude oil prices. Raw material inflation stood at
(No of shares)
20% in Q1FY2023. With a recent correction in the key input prices, the raw material inflation is expected
to cool off from H2FY2023. This will help OPM improve in H2FY2023. We expect OPM to stand at 25%
Shareholding (%) in FY2024 with expected decline in the key input prices and efficiencies through cost-saving initiatives.
Our Call
Promoters 61.9
Valuation – Maintain Buy with an unchanged price target of Rs. 2,850: With a strong portfolio of brands,
FII 13.9 a formidable team with great focus supported by R&D and agile distribution and supply chain, HUL’s
management is focusing on enhancing the shareholder’s value eventually. Recent correction in the key
DII 12.2 input prices augurs well for margins and will gradually boost volume growth in the absence of major price
hikes in the quarters ahead. The stock is currently trading at 59.0x and 48.9x its FY2023E/24E earnings.
Others 12.03 Leading position in some high-penetrated categories, thrust on innovation and market development to
remain competitive and drive consistent earnings growth makes it good pick from long-term perspective. We
Price chart maintain a Buy recommendation on the stock with an unchanged price target of Rs. 2,850.
3100 Key Risks
Sustained slowdown in the rural demand or persistent volatility in key input prices from the current levels
2700 would act as a key risk to our earnings in the near term.

2300
Valuation (standalone) Rs cr
1900
Particulars FY21 FY22 FY23E FY24E
1500 Revenue 46,546 51,693 59,911 67,642
Sep-21

Sep-22
May-22
Jan-22

OPM (%) 24.3 24.2 23.7 25.0

Adjusted PAT 8,136 8,845 10,072 12,139
Price performance Adjusted EPS (Rs.) 34.6 37.6 42.9 51.7
(%) 1m 3m 6m 12m P/E (x) 73.0 67.2 59.0 48.9
P/B (x) 12.5 12.2 12.0 11.4
Absolute -5.4 20.3 20.8 -8.3
EV/EBIDTA (x) 51.9 47.0 41.2 34.4
Relative to RoNW (%) 29.3 18.4 20.5 23.9
-3.3 5.5 18.9 -8.0
Sensex
RoCE (%) 37.1 24.1 27.1 31.8
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

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CEO Corner (Sanjiv Mehta – MD and CEO of HUL)

Š In challenging times too, HUL posted robust numbers for FY2022 led by a clear strategy, strength of
brands, execution process and supply chain agility.
Š Revenues crossed Rs. 50,000 crore in FY2022; revenue growth stood at 11% with 3% volume growth
(ahead of industry growth).
Š More than 75% of portfolio gained volume and value market share; highest the company had in last one
decade. Market share in the haircare portfolio touched 15 years high.
Š HUL has 2x more superior products compared with its 2019 portfolio.
Š In Beauty & personal care (BPC) business the focus was on growing core leveraging on Winning In
Many India (WIMI) strategy designed products based on specific needs of the consumers across different
regions in the country.
Š In the home care business, the purpose-driven brands sustained their strong performance in fabric wash
and household care segments on back impactful communications based on social cause.
Š Surf Excel is the biggest laundry brand in India while liquid detergents and fabric conditioners business
has grown four times in last five years.
Š Food and Refreshment (F&R) brands continued to attract new consumers through superior products,
impactful innovation and purposeful activations.
Š HUL carried out extensive market development activities for our nutrition portfolio, consisting of iconic
brands like Horlicks and Boost, and even launched a ‘High Science’ range of products such as Diabetes
Plus, Mother’s Plus and more.
Š To remain future fit in an increasingly technology enabled world, the company is employing sophisticated
digital tools to identify new innovation partners, monitoring and reviewing quality performance, and
tracking logistics and supply risks in real time.
Š The company focused on efficiently working with all its trade partners and attending the consumers
changing needs. It is helping traditional channels to embrace technology through Shikhar App that
enables zero touch online ordering. The company has 8 lakh stores enrolled to Shikhar App.
Source: HUL annual report; Sharekhan research

HUL strategies towards fulfilling purpose and vision

Developing portfolio
Growing the Core Accelerating Market Development Driving Premiumisation

Win with brands as a force for good, powered by purpose and innovation
Improve the health of the Improve people’s health, Contribute to a fairer, more Win with differentiated science
planet confidence, and wellbeing socially inclusive world and technology

Lead in the channels of the future

Accelerate pure-play and om- Strengthen e-B2B presence Drive category leadership
ni-channel e-Commerce through shopper insight

Build differentiated structures and capabilities

Empowered Business Units Winning in Many India’s (WiMI) Digital transformation (Reimag-
ine HUL)

Build a purpose-led, future-fit organisation and growth culture

Unlock capacity through agility Be a beacon for diversity, inclusion, and values-based leader- Upskill through lifelong learn-
and digital ship ing
Source: Company; HUL annual report

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Š Developing portfolio
Š Powering the core: HUL is growing its core business by investing in purposeful brands and delivering
superior products. The company is bringing to life its product philosophy of Designing for India and
Winning in Many Indias (WiMI). HUL is also bringing this thought process into Skin Care & Hair Care
with products like Pond’s Light Moisturiser that is specifically designed to perform in hot and humid
weather. HUL continues to strengthen brand equity through consistent, purposeful communication on
its iconic brands. Clinic Plus, Dove and Sunsilk were rated as the Top 3 Hair Care brands in the country
as per ‘Kantar Brand Health Check Report’. Lifebuoy continues to build the habit of handwashing,
through the ‘H for Handwashing’ campaign.
Š Accelerating market development: HUL’s priority is to drive growth in its five big beauty master-
brands, Dove Pond’s, TRESemmé, Lakmé and Indulekha, which 0span across categories. Through
compelling communication, the company is addressing key category triggers and barriers, as well
as scaling up education-led sampling. The company is also creating new capabilities for driving
‘beauty’ market development through salons, medical marketing, and online marketing, which serves
as a distinct competitive advantage. HUL continues to strengthen its ‘naturals’ strategy by building
specialist brands like Indulekha and Hamam.
Š Driving premiumisation: HUL continued its strategy of upgrading consumers and premiumising its
portfolio. Premium products outperformed the rest of the portfolio. Through its portfolio which straddles
the price-benefit pyramid, HUL continues to actively engage with consumers in their upgradation
journey. For instance, Surf Excel has been driving upgradation in detergent powders, led by Surf
Excel Easy Wash and Surf Excel Matic. Premiumisation continues to be an important agenda for the
dishwash business and with a strong and scalable consumer contact programme, Vim Liquid continues
to pioneer premiumisation in the country.

Š Lead in the channels of the future

Š Accelerate pure-play and omni-channel e-Commerce: Design for Channel has been one of the
strategic thrusts for HUL and the company is designing products and organising its business for
organised retail by collaborating with its customers and partners. The company is also expanding
its digital presence through D2C platforms – HUL now has D2C websites for its premium brands like
Lakmé, Indulekha, Simple and a multi-brand platform UShop. HUL has created teams exclusively to
focus on niche aspects such as search and discoverability in the omni-channel space, acquiring new
capabilities like performance marketing and visibility optimisation across platforms and partners in
this fast-growing and highly competitive arena. All these initiatives have now enabled HUL to capture
more than 20% of its demand digitally and gives the company a unique ability to run its demand
generation and demand fulfilment activities in a disruptive way.
Š Strengthen e-B2B presence: HUL is building competitive moats across demand capture, demand
fulfilment and generation enabled by digitalisation and data-driven analytics. Shikhar, HUL’s e-B2B
online ordering solution is a real game-changer for the company which gives retailers the flexibility to
order at any point of time without waiting for the salesman to visit the store, providing recommendation
for the right assortment, and ensuring reliable service to the retailer. HUL has now scaled Shikhar to
cover more than 8 lakh stores.
Š Drive category leadership through shopper insight: HUL monitors external market trends and collates
consumer, customer, and shopper insights to develop category and brand strategies. HUL invests in
markets and segments where the company has built, or is confident to build, competitive advantage.

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New product launches and relaunches over the years

New launches Relaunches

FY2022 13 6 3 FY2022 2

FY2021 17 12 2 FY2021 1 1 3

FY2020 11 8 15 FY2020 1

FY2019 4 4 12 FY2019 8 1 1

0 5 10 15 20 25 30 35 0 2 4 6 8 10
Beauty & Personal care Homecare Foods & Refreshment Beauty & Personal care Homecare Foods & Refreshment

Source: Company, Sharekhan Research

Š Build differentiated structures and capabilities

Š Empowered Business Units: In early 2021, HUL set up the Premium Beauty Business Unit (PBBU)
within the Beauty & Personal Care organisation to strengthen its play in ‘Masstige’ beauty segment.
The unit is now fully operational with three digital-first brands Simple, Love Beauty & Planet and Baby
Dove. PBBU is not just about building brands but also about incubating organisation-wide capabilities
fit for the fast-changing digital world.
Š Winning in Many Indias (WiMI): Winning in Many Indias (WiMI) has been a cornerstone of the company’s
strategy. Looking at the diverse nature of our country HUL has de-averaged India into 15 consumer
clusters. This brings the company close to the consumers and allows to capture consumer trends at a
granular level. With the help of these rich granular insights, HUL can deploy customised strategies to
drive growth. As consumers increasingly become more discerning, HUL’s WiMI strategy will continue
to keep us future-fit.
Š Digital transformation (Reimagine HUL): HUL has been a leader in using big data and analytics
as a tool to drive sustainable growth. The company continues to drive organisation-wide digital
transformation agenda under the umbrella of ‘Reimagine HUL’ to capture digital opportunity. Pre-
empting the imminent disruption, HUL has established a sharp digitalisation agenda in each function.
These include those around core ERP platform using Cloud, AI, and other digital technologies. Each
day the company builds new capabilities in Systems, Workforce and Business Models with strong
focus on external orientation and partnerships across large IT Companies/Industry Bodies. The
company is also invested to make sure that its talent is digitally enabled and future-fit to ride the
digital transformation wave.

Š Build purpose-led, future-fit organisation and growth culture

Š Unlock capacity through agility and digital: The company has introduced more flexible and agile ways
of working that unlock capacity and help individuals find a meaningful and balanced way of working.
HUL’s AI-powered internal talent marketplace allows the company to match people with specific skills
to projects that require them. This helped assign resources to over 500 business critical projects when
teams faced capacity constraints.
Š Be a beacon for diversity, inclusion, and values-based leadership: HUL has identified its equity,
diversity, and inclusion priorities – gender, people with disabilities and LGBTQI+ communities. The
company is building the capabilities of its business leaders and HR practitioners to support equity
advocacy, diversity awareness and psychological safety in their teams. HUL continues to make

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progress in its commitment to be gender balanced across its managerial levels within the next few
years. In 2021, the company improved gender balance from 42% to 44% at managerial levels. Another
step in our diversity journey has been the introduction of 250+ women in its extended sales ecosystem
and the addition of 186 women on our shopfloor. In 2021, the company also launched the HUL ProUd
network as an employee resource group for LGBTQI+ employees and allies.
Š Upskill through lifelong learning: HUL continues to build organisational capabilities with a clear focus
on functional learning to enable its people to upskill and reskill for their roles and help them prepare
for the changing landscape of work. In its latest employee survey, 87% of people in offices and 94% of
people in factories believe that the company provides opportunities for skill development.

Risk management at HUL

Type of Risk Risk Description Management of Risk
Brand The company's success depends on value and relevance The company monitors external market trends and
preference of brands and products to the consumers and on the collates consumer, customer, and shopper insights to
company's ability to innovate and remain competitive. develop category and brand strategies as well as invest
Consumer tastes, preferences and behaviours are in markets and segments where they have built, or are
changing more rapidly than ever before. The company confident that they can build, competitive advantage.
sees a growing trend for consumers preferring brands The company’s R&D function actively identifies ways to
which both meet their functional needs and have an translate trends in consumer preferences into modern
explicit social or environmental purpose. technologies for incorporation in future products. The
innovation management process converts category
strategies into projects which deliver new products to
market as well as develop product ideas both in-house
and with selected partners to enable the company's
consumer trends with speed.
Supply chain The business depends on purchasing materials, efficient Commodity price risk is actively managed through
manufacturing, and the timely distribution of products to forward buying of traded commodities, other hedging
customers. Cost of products can be significantly affected mechanisms, and product pricing. Trends are monitored
by cost of the underlying commodities and materials and modelled regularly and integrated into forecasting
from which they are made. Fluctuations in these costs process. The company has contingency plans designed to
may negatively impact business especially if such secure alternative key material supplies at short notice, to
movements are not effectively managed. transfer or share production between manufacturing sites
and to use substitute materials in product formulations
and recipes.
Business Successful execution of business transformation All acquisitions, disposals and transformation projects
transformation projects is key to delivering intended business benefits have steering groups in place led by senior leadership
and avoiding disruption to other business activities. teams. Sound project discipline is followed in all
HUL is continually engaged in major change projects, transformation projects and these projects are resourced
including acquisitions, disposals, and organizational by dedicated and appropriately qualified personnel. All
transformation, to drive continuous improvement in such projects are monitored through strong governance
the business and to strengthen their portfolio and and reviewed by the board for delivery of maximum
capabilities. The company has an extensive program of synergies.
transformation projects.
Quality and The quality and safety of products are of paramount The company's product quality processes and controls
safety importance for the company’s brands and reputation. The are comprehensive, from product design to customer
risk that raw materials are accidentally or maliciously shelf. The internal safety and quality norms are
contaminated throughout the supply chain or that other constantly reviewed to ensure that the products meet the
product defects occur due to human error, equipment most stringent norms. HUL has a robust quality inspection
failure or other factors cannot be excluded. Labelling process in all manufacturing and warehousing locations
errors can have potentially profound consequences for to avoid and detect quality and safety issues. The key
both consumer safety and brand reputation. suppliers are externally certified, and the quality of
material received is regularly monitored to ensure that
it meets the rigorous quality standards that the products
require. The company has processes in place to ensure
that the data used to generate on-pack labelling is
compliant with applicable regulations and HUL labelling
policies to provide the clarity and transparency needed
for consumers.
Source: Company; Sharekhan Research

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Change in brand positioning over the years

5,000+ crore 2,000+ crore brands 1,000+ crore brands 500+ crore brands
brands
Sep-15 - Surf Excel, Brooke Bond, Dove, Vim, Lux, Clinic Plus, Lakme, Bru, Kissan, Closeup,
Fair and Lovely, Active Wheel, Ponds Vaseline, Pears
Lifebuoy, Rin
Jun-17 - Surf Excel, Brooke Bond, Dove, Vim, Lux, Clinic Plus, Lakme, Bru, Kissan, Closeup,
Fair and Lovely, Active Wheel, Ponds Vaseline, Pears, Kwality Walls,
Lifebuoy, Rin Sunsilk
FY19 & - Surf Excel, Brooke Bond, Rin, Dove, Vim, Lux, Clinic Plus, Bru, Kissan, Closeup, Vaseline,
FY20 Fair and Lovely, Active Wheel, Ponds, Lakme Pears, Kwality Walls, Sunsilk,
Lifebuoy Sunlight
FY21 & Surf Excel, Glow and Lovely, Active Wheel, Lux, Clinic Plus, Ponds, Lakme, Closeup, Vaseline, Pears, Sunsilk,
FY22 Brooke Bond Lifebuoy, Rin, Dove, Horlicks, Vim Bru, Kissan, Kwality Walls Sunlight, Boost, Comfort
Source: Company; Sharekhan Research; Green indicates moved position up; Red indicates moved position down

Š Win with brands as a force for good, powered by purpose and innovation
HUL has certain strategies in place towards the Environmental, Social and Governance (ESG)
responsibilities.

Environmental Social Governance

Net zero emissions for all the company's Double the number of products sold that Ensure that everyone who directly
products from sourcing to point of sale deliver positive nutrition by 2025 provides goods and services to HUL will
by 2039 earn at least a living wage or income by
2030
Zero emissions in the company's opera- 95% of packaged ice cream to contain Help equip 1.5 million young people with
tions by 2030 no more than 22g total sugar per serving essential skills by 2030
by 2025
Deforestation-free supply chain in palm 85% of the Foods portfolio to help Accelerate diverse representation at all
oil, paper and board, tea, soy, and cocoa consumers reduce their salt intake to no levels of leadership
by 2023 more than 5g per day by 2022
Halve food waste in the company's oper- 5% of the workforce to be made up of
ations by 2025 people with disabilities by 2025
FY21 & FY22 Lux, Clinic Plus, Ponds, Lakme, Bru, Kiss- Closeup, Vaseline, Pears, Sunsilk, Sun-
an, Kwality Walls light, Boost, Comfort
Source: Company; Sharekhan Research;

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FY2022 – Performance of ESG factors

Source: HUL annual report

Segment wise performance for FY2022

Beauty & Personal Care (BPC)
The BPC segment contributed 39% to the company’s revenue and grew by 8% y-o-y to Rs. 19,460 crore in
FY2022 with PBIT margin at 28%. To achieve its new Positive Beauty vision, HUL is using its scale to create
positive change and drive growth through big brands, impactful innovation, and portfolio transformation. In
its Skin Cleansing portfolio, HUL’s brands Lifebuoy and Lux have introduced winning products by regions with
consumer centricity at the heart of the product design philosophy. In Skin Care, Dove launched Love & Care, a
new range of hand and body moisturisers while Pond’s introduced its gold beauty range including Facewash,
Serum, Day Crème, Peel off Mask, and a Night Crème. Lakmé expanded its cosmetics range with volume
mascara, highlighter, and liquid concealer.
Trend in BPC revenue and PBIT margin
20,000 29.0
19,460
19,500 28.5
19,000 28.5
28.0
28.1
18,500
27.5
Rs. crore

17,964
18,000 27.5
%

17,655
27.0
17,500 17,345
26.8 26.5
17,000

16,500 26.0

16,000 25.5
FY2019 FY2020 FY2021 FY2022
Beauty & Personal care revenue PBIT Margin

Source: Company, Sharekhan Research

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Homecare (HC)
This segment contributed 31% to the company’s revenue and grew by 19% y-o-y to Rs. 16,578 crore in FY2022
with PBIT margins of 19%. HUL’s dishwash portfolio continued its resilient performance. Vim with its well-
defined purpose of ‘change your outlook, move beyond dishes’ focussed on breaking the societal stereotype
that dishwashing is solely a woman’s responsibility. Based on a clear consumer need, HUL’s home hygiene
brand Domex launched a superior product backed by a breakthrough patented Fresh Guard technology
which fights malodour in toilets for 100 flushes.
Trend in BPC revenue and PBIT margin
17,000 16,578 21.0

16,000 20.0

15,000 19.9
18.8
19.3 19.0
13,959
Rs. crore

14,000 13,642
18.0

%
12,876
13,000
17.0
12,000
16.7
11,000 16.0

10,000 15.0
FY2019 FY2020 FY2021 FY2022
Homecare revenue PBIT Margin

Source: Company, Sharekhan Research

Foods & Refreshment (F&R)

The F&R segment contributed 29% to the company’s revenue and grew by 7% y-o-y to Rs. 14,105 crore in
FY2022 with PBIT margin at 19%. HUL’s brands continue to provide great-tasting, nutritious and sustainable
foods for consumers – using its world-class innovation and brand purpose to inspire change. During the
year, the Ice Cream and Frozen Desserts business recovered strongly and was significantly ahead of pre-
pandemic levels. HUL scaled up its in-home consumption portfolio through innovative, delicious products
like the Kwality Wall’s Cadbury Crackle tub and the Trixy cup. Offering sweet delicacies to consumers during
festive season, Kwality Wall’s activated integrated campaigns to reach consumers offline as well as online.
To address nutrition needs at various stages of life the company has expanded the Horlicks portfolio with the
high sciences range such as Diabetes Plus, Mother’s Plus, etc.
Trend in BPC revenue and PBIT margin
15,000 19.0
14,105
14,000 13,204 18.5
13,000 18.6
18.0
12,000
11,000 17.2 17.5
Rs. crore

10,000 17.0
%

16.5 16.6
9,000 16.5
8,000 7,450
7,133 16.0
7,000
6,000 15.5

5,000 15.0
FY2019 FY2020 FY2021 FY2022
Foods & Refreshment revenue PBIT Margin

Source: Company, Sharekhan Research

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Performance of Subsidiaries
1. Unilever India Exports Limited

Unilever India Exports Limited is a wholly owned subsidiary of the company and is engaged in FMCG
exports business. The focus of the FMCG exports operation is two-fold: to develop overseas markets by
driving distribution of brands, such as Vaseline, Dove, Pears, BRU, Red Label, Lakmé, Horlicks, Boost and
to effectively provide cross-border sourcing of FMCG products to other Unilever companies across the
world. The topline growth of the company was driven by robust growth in Personal Wash, Personal care,
and culinary products portfolio. Brands like Dove, Vaseline, Lakmé, Glow & Lovely, Horlicks, Lifebuoy,
Knorr and Kissan have registered healthy growth in the focused markets.

2. Lakme Lever Private Limited

Lakme Lever Private Limited is a wholly owned subsidiary of the company engaged in Salon’s business
and operates a manufacturing unit at Gandhidham, which carries out job work operations for the company
by manufacturing toilet soaps, bathing bars and detergent bars. The company delivered robust topline
and bottom-line growth led by recovery in the salon business which was impacted by Covid-19 during
FY2021. With focus on safety, quality of operations, expert treatments and prudent cost optimization, the
salon business continues to perform well in the beauty services category. Job work business continues its
strong topline and bottomline growth momentum. It has over 400 owned/managed and franchisee salons.
Innovations like Free Spirits – vibrant colors, Beautysutra facials and manicure/pedicure treatments and
Tresplex hair treatments added excitement to the comprehensive Runway Secrets portfolio. Thematic
campaigns – Good Hair Day, Happy New You and Hair Tech helped gain new clients and sustain existing
ones. Lakmé Salon was awarded several awards notable amongst which are Best Franchisor – Beauty
and Wellness at the Franchise India Summit and Best National Salon Chain at the Salon Congress.

3. Hindustan Unilever Foundation

Hindustan Unilever Foundation (HUF) is a not-for-profit company that anchors water management related
community development and sustainability initiatives of Hindustan Unilever Limited. The company
operates the ‘Water for Public Good’ program, with a specific focus on water conservation, building local
community institutions to govern water resources and enhancing farm-based livelihoods through adoption
of judicious water practices. HUF’s programs currently reach over 10,000 villages in 46 Districts in eight
states and two union territories across India in partnership through 15 NGO partners and multiple co-
founders. The Company also supports several knowledge initiatives in water conservation, governance,
and behavior change.

4. Unilever Nepal Limited

Unilever Nepal Limited (UNL) manufactures, markets and sells detergents, foods and refreshment
products, toilet soaps, personal products, and laundry soaps in Nepal. Transformation programs such as
Distributor Management System and SAP migration are helping in faster decision-making, localized and
swifter innovation delivery and increased speed-to market.

5. Unilever India Limited

Unilever India Limited is a wholly owned subsidiary of the company that had been incorporated to
leverage the growth opportunities in a fast-changing business environment. Presently, it is setting up its
manufacturing facility at Sumerpur, Uttar Pradesh. It is proposed to manufacture detergent powder at this
facility. This company is on-track to commission its factory and start commercial production in FY2023.

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FY2022 – Double digit revenue growth (price-led); OPM remained stable

Š Standalone revenue from operations grew by 11.1% y-o-y to Rs. 51,693 crore. The revenue growth was
price-led while domestic volume growth stood at 3% (ahead of industry growth).
Š A sharp increase in the palm oil prices and other key input prices led to 200 bps y-o-y decline in gross
margins to 51.4%. This is despite 7-8% increase in the price hikes.
Š Despite a decline in gross margins, OPM stood flat at 24.2% on account of 110 bps decrease in the
advertisement spends percentage to sales and 50 bps decline in the other expenses as percentage to
sales on back of operating efficiencies.
Š Other income stood at Rs. 393 crore in FY2022 lower than Rs. 513 crore in FY2021. Lower other income
was on account of Rs. 118 crore decline in the interest on bank deposits to Rs. 95 crore and interest on
others (including interest on income tax refunds) decreased by Rs. 100 crore to Rs. 32 crore.
Š Adjusted PAT grew by 8.7% y-o-y to Rs. 8,845.2 crore lower than the revenue growth on account of lower
other income.
Š Revenue and PAT grew by 15% and 13% respectively on two-year CAGR basis.
Balance sheet – Stable operating cash flows; investment and yield on investments increased
Š Working capital days decreased by 10 days to 68 days in FY2022 from 81 days on account of 10 days
decline in the creditor days. Inventory days remained stable at 28 days.
Š Cash from operations (pre-tax) stood stable at Rs. 11,684 crore in FY2022 vs. Rs. 11,324 crore in FY2021.
Š Investments on books increased to Rs. 3,512 crore from Rs. 2,685 crore in FY2021 (and from Rs. 1,250 crore
in FY2020). Yield on investments improved to 2.3% in FY2022 from 0.2% in FY2021.
Š Asset turnover ratio stood at 1.3x in FY2022 vs. 1.2x in FY2021.
Š The company paid dividend of Rs. 34 per share in FY2022 (dividend payout stood at 90.3%) as against Rs.
40.5 per share in FY2021 (dividend payout stood at 115.5%).
Š RoE decreased to 18.4% in FY2022 from 29.3% in FY2021 due to acquisition led increase in the equity.
RoCE stood at 24.1% in FY2022 as against 37.1% in FY2021.

HUL’s domestic volume growth to improve from Q3FY2023

HUL’s registered resilient volume growth of 6% in Trend in quarterly volume growth
Q1FY2023 driven by sustained strong demand in
18.0
16.0
the urban demand while rural demand remained 16.0
muted due to higher inflationary pressure. Market 14.0
share gains across categories, across price points 12.0
and across key markets and sustenance of robust 10.0 9.0

growth in some of the premium categories aided

%

8.0
6.0
the company to post better sales volume ahead of 6.0
4.0 4.0
industry. Rural sales volumes are expected to remain 4.0
2.0
1.0
under pressure in Q2FY2023. However, green shoots 2.0
-
-
are visible - 1) Anticipation of normal monsoon for the Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23
fourth consecutive year, 2) better kharif production 3) Volume growth (y-o-y)
higher fertiliser subsidy by the government and 4) a
Source: Company, Sharekhan Research
rise in the agri-commodity prices aiding to generate
higher agri-incomes, which will push the demand in
the quarters ahead. Further with limited price hikes in the core portfolio after recent fall in the key input prices
would help in improving the demand for the products in the key markets.

September 16, 2022 10

 Stock Update
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Decline in the palm oil prices and other key input prices would ease out margin pressure
Prices of some key inputs such as palm oil and crude derivatives (such LAB and packaging material) corrected
from its high in past 2-3 months. Palm oil prices are down by 50% from its high in April,2022, LAB prices down
by ~6-8% and reduction in the packaging cost due to fall in the crude oil prices. Raw material inflation stood
at 20% in Q1FY2023. With recent correction in the key input prices, the raw material inflation is expected to
cool off from H2FY2023. This will help OPM to be much better in H2FY2023. We expect OPM to stand at 25%
in FY2024 with expected decline in the key input prices and efficiencies through cost saving initiatives.

Trend in palm oil prices and impact on HUL’s gross margins

7,000 54.0
52.6
52.1
6,500 51.6
52.0
50.4
6,000 49.5
Palm oil (MYR /Toone)

50.0
5,500
47.4 48.0

%
5,000
46.0
4,500
44.0
4,000

3,500 42.0

3,000 40.0
Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23
Palm oil MYR/TN HUL gross margins

Source: Company, Sharekhan Research

Correction in palm oil prices in the last four months

5,500

5,000
Palm oil (MYR /Toone)

4,500

4,000

3,500

3,000
Jun-22 Jul-22 Aug-22 Sep-22

Source: Company, Sharekhan Research

September 16, 2022 11

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Financials in charts

Steady growth in revenue and PAT Margins to improve slightly

80,000 27.0
67,642 24.8 25.0
70,000 24.3
25.0 24.2
59,911 23.7
60,000
51,693
46,546 23.0
50,000
38,785
Rs. cr

40,000 21.0

%
30,000
19.0
20,000
10,072 12,139
6,886 8,136 8,845 17.0 18.1
10,000 17.8 17.7
17.3 17.0
- 15.0
FY2020 FY2021 FY2022E FY2023E FY2024E FY2020 FY2021 FY2022E FY2023E FY2024E
Revenue PAT OPM NPM

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Return ratios to improve Consistent working capital days

120.0 0
105.2
-10
100.0
-20

80.0 87.8 -30

-40
days

60.0
%

-50
37.1 -63
40.0 31.8 -60 -68
27.1 -70 -70
24.1
-70
-81
20.0 29.3
23.9 -80
18.4 20.5
- -90
FY2020 FY2021 FY2022E FY2023E FY2024E FY2020 FY2021 FY2022E FY2023E FY2024E
RoNW RoCE Working capital days

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Stable operating cash flow generation Consistent dividend payout

14,000 140
11,571 11,829 117
12,000 120
10,134 98
10,000 100 92 94
90
8,321 8,567
8,000 80
Rs. cr

6,000 60

4,000 40

2,000 20

0 0
FY2018 FY2019 FY2020 FY2021 FY2022 FY2018 FY2019 FY2020 FY2021 FY2022
Cash flow from operations Dividend payout

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

September 16, 2022 12

 Stock Update
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Outlook and Valuation

n Sector Outlook – Deflating commodity prices augurs well; good monsoon key for rural demand
High consumer inflation and slowdown in the rural demand will keep pressure on the sales volumes in the near
term. However, a normal monsoon, cool-off in the commodity prices and improved consumer sentiments will help
volume growth to recover in H2FY2023. Consumer goods companies’ margins were lower in Q1FY2023 with raw
material prices remaining higher. However, the scenario has changed in last one and half months with commodity
prices cooling from its high providing some breather for consumer goods companies. Companies are expected
to see expansion in margins from H2FY2023. Overall, we expect H2FY2023 to be much better as compared to
H1FY2023 with expected recovery in the volume growth and expansion in the margins in Q3/Q4FY2023. Low
penetration levels in key categories (especially in rural India), lower per capita consumption compared to other
countries, a large shift to branded products, and emergence of new channels such as e-Commerce/D2C provide
several opportunities for achieving sustainable growth in the medium to long run.
n Company Outlook – Focus remains on achieving competitive volume growth
With a leadership position in over 80% of the portfolio and presence in more than 8 million stores, HUL is well
poised to achieve healthy growth in the coming years. Recovery in the rural demand, improvement in demand for
out-of-home categories with an improvement in mobility, addition of relevant products in portfolio, and sustained
improvement in the penetration of key categories remain key growth drivers in the near term. The company
continues to focus on achieving competitive volume growth with strategies in place in the near to medium term.
Better product mix with a recovery in discretionary categories, calibrated price hikes, and operational efficiencies
along with integration benefits would help margins to improve in the medium term. Management is targeting
moderate margin improvement every year.
n Valuation – Maintain Buy with an unchanged PT of Rs. 2,850
With a strong portfolio of brands, a formidable team with great focus supported by R&D and agile distribution and
supply chain, HUL’s management is focusing on enhancing the shareholder’s value eventually. Recent correction
in the key input prices augurs well for margins and will gradually boost volume growth in the absence of major
price hikes in the quarters ahead. The stock is currently trading at 59.0x and 48.9x its FY2023E/24E earnings.
Leading position in some high-penetrated categories, thrust on innovation and market development to remain
competitive and drive consistent earnings growth makes it good pick from long-term perspective. We maintain a
Buy recommendation on the stock with an unchanged price target of Rs. 2,850.
One-year forward P/E (x) band
2,900.0
60x
2,700.0
55x
2,500.0
50x
2,300.0
2,100.0 45x

1,900.0
1,700.0
1,500.0
1,300.0
1,100.0
900.0
700.0
500.0
Mar-15

Mar-16

Nov-17

Jan-21
Apr-17

Aug-21
Dec-18

Dec-19
Oct-16
Sep-15

Feb-22

Sep-22
May-18

Jun-19

Jul-20

Source: Company, Sharekhan Research

Peer Comparison
P/E (x) EV/EBITDA (x) RoCE (%)
Particulars
FY22 FY23E FY24E FY22 FY23E FY24E FY22 FY23E FY24E
Nestle India* 85.3 76.6 72.1 55.0 49.3 47.5 136.4 138.3 127.8
ITC 26.8 22.6 19.6 20.2 16.1 14.2 27.1 32.7 35.4
Godrej Consumer Products 51.1 45.3 38.7 37.4 33.5 29.0 17.3 17.9 19.3
HUL 67.2 59.0 48.9 47.0 41.2 34.4 24.1 27.1 31.8
Source: Company, Sharekhan estimates; *Nestle is a calendar year ending company

September 16, 2022 13

 Stock Update
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About company
HUL is India’s largest FMCG company with a strong presence in the homecare and beauty and personal care
categories. The company is a subsidiary of Unilever Plc (that holds a 67% stake in HUL), the world’s largest
consumer goods company present across 190 countries. With over 40 brands spanning 12 distinct categories
such as personal wash, fabric wash, skin care, hair care, oral care, deodorants, colour cosmetics, beverages,
ice creams, frozen desserts, and water purifiers, HUL is part of the everyday life of millions of consumers
across India. The company’s portfolio includes leading brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel,
Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, and Axe.

Investment theme
HUL has a leadership position in highlypenetrated categories such as soaps, detergents, and shampoos in
India. Sustaining product innovation, entering into new categories, premiumisation, and increased distribution
network remain some of the key revenue drivers for the company. The merger of GSK Consumer’s HFD
business will make HUL a formidable play in the HFD segment and will enhance the growth prospects of its
small food business. A strong financial background, robust cash-generation ability, and leadership position
in some key categories give HUL an edge over other companies and, hence, justify the stock’s premium
valuation.

Key Risks
Š Slowdown in the demand environment: Any slowdown in demand (especially in rural India) would affect
sales of key categories, resulting in moderation of sales volume growth.
Š Increased input prices: Palm oil and crude derivatives such as linear alkyl benzene are some of the key
raw materials used by HUL. Any significant increase in the prices of some of these raw materials would
affect profitability and earnings growth.
Š Increased competition in highly penetrated categories: Increased competition in highly penetrated
categories such as soaps and detergents would act as a threat to revenue growth.

Additional Data
Key management personnel
Sanjiv Mehta Chairman and Managing Director
Ritesh Tiwari Executive Director, Finance & IT and Chief Financial Officer
Willem Uijen Executive Director, Supply Chain
Dev Bajpai Executive Director, Legal and Corporate Affairs and Company Secretary
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Life Insurance Corp of India 4.46
2 Blackrock Inc 1.33
3 Vanguard Group Inc 1.27
4 SBI Funds Management 1.12
5 JP Morgan and Chase 0.58
6 ICICI Prudential Life Insurance Co. 0.58
7 UTI Asset Management Co Ltd 0.40
8 Abrdn PLC 0.37
9 Norges Bank 0.31
10 ICICI Prudential Asset Management Co. 0.29
Source: Bloomberg (Old data)

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

September 16, 2022 14

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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