About the Stock

Hindustan Unilever Limited (HUL) is the biggest Fast-Moving Consumer Goods firm in India. The company has an experience of more than 90 years. It operates in various business segments- beauty and personal care, home care, food  and refreshments. HUL’s products are seen in at least 9 out 10 Indian households. The company is a subsidiary of Unilever, which is considered as the leading FMCG firm in the world.

The company’s sales are mainly in India. Its manufacturing units are located in different parts of the country. Some of the leading household products and brands of the company are Pond’s, Lakme, Lux, Knorr, Rin, Bru, Clinic Plus, and many more.

Quarterly Updates

Marginal growth in revenue and EBITDA

In the 3Q of financial year 2025. HUL recorded marginal growth in revenue and EBITDA by about 1.4 percent and 0.8 percent YoY, respectively.  The EBITDA margin is posted as 23.5 percent as it is contracted by 20 bps compared to 3QFY24. In terms of volume growth, it was flat YoY. The growth of the company was adversely impacted by elevated material prices and subdued  urban consumption demand in the country. The company also recorded shift of consumers towards small packs, despite of the prevailing premiumisation trend in the market.

Growth in PAT driven by divestment

The company registered a strong growth in terms of PAT which accounts to 19.1 percent YoY and 14.9 percent QoQ. One of the reason for this is income generation from divestment and also decline in advertising expense of the company. However, the growth in PAT (excluding exceptional items) contracts to -2.2 percent YoY and -5 percent QoQ. The growth trend was not surprising much due to muted growth in the second quarter as well and the prevailing market condition.

Flat Volume Growth

The growth in different segment was supported by pricing strategy but the volume growth remain flat for the company.

Segment-wise growth

• Home-Care- It is the biggest segment of the company. In 3QFY25, the company recorded income of around 5.4 percent growth compared to 3QFY24. It was mainly driven by its volume growth in Fabric Wash and Household Care products growth. The segment recorded highest growth compared to other segments of the company.
• Beauty and Wellbeing- The segment recorded marginal rise of 1.4 percent YoY in this third quarter. It was mainly driven by  Hair Care product portfolio and consumption of sachets.
• Personal Care- The segment recorded contraction of around 3 percent YoY in this quarter due to  decline in demand for hygiene related products, especially skin cleansing products.
• Foods- HUL recorded a flat income growth of 0.3 percent YoY. The revenue growth of segment suffered from inflationary pressures on consumption levels. In terms of volume growth, the company recorded mid-single digit contraction.

Commentary

• The rural demand in the country is in recovery phase and urban consumption demand is moderate. In addition to this, the consumers are shifting towards smaller packets of products rather than large packets.
• In terms of segment-wise performance, the home segment recorded high single-digit volume growth. Other segments like beauty and wellbeing segment observed contraction by low single digit and contraction to mid-single digit volume growth in food and personal care segment.
• Despite the subdued consumption levels in the country, the home care segment was able to stand out as many products falls in the essential category.
• The completion of the divestment of its Pureit, water-purifier business led to net profit of the company, other-wise it would have been flat in the third quarter of FY25. After excluding it, the company records net profit contraction by 2.2 percent YoY and 5 percent QoQ. The reason for this is higher deprecation cost and tax expenses in this quarter.
• The company has taken some important decision such as divestment of Pureit, demerger of Kwality, acquisition of Minimalist and Vishwatej Oil Industries’ Palm Undertaking.
• Beauty and wellbeing segment recorded marginal growth supported by strong growth in consumption and new products related to hair care division. It faced the issue of subdued performance in skin care and colour cosmetics due to delayed winter and mask skin portfolio.
• In this current scenario, the company anticipates that the moderate consumption trend will continue in the upcoming quarters as well. It projects its EBITDA to be at the lower rate in the range of 23 to 24 percent.

Con Call Highlights

Consumption demand situation 

In the present times, India is facing subdued consumption demand in the market and a gradual recovery in demand at rural level. This resulted in the FMCG sector recording low volume growth in the previous  six months. The trends in the market indicate a rise in preference for small packs in various product portfolios. This trend is more observed for non-essential category of products, and less noticeable for Home Care products, which falls in the category of essential products. In terms of premiumization trend in the market continues to remain strong compared to the mass segment in the third quarter of the financial year 2025. It reflects that the consumer’s preference towards high-end products is strong even in midst of expansion in preference for small packets of various products in order to manage their total expenditures.

Elevated Commodity prices

The company recorded surged in prices of crude, palm oil, and tea on a year-on-year basis. In contrast to this, the price of soda ash continues to remain at the same level. In the third quarter of FY25, the prices of crude oil declined and depreciation of rupee took place by 1 percent compared to the dollar. Even so, there have been major fluctuations in the prices of crude oil, palm oil, and rupee. The company focuses on monitoring this price volatility and taking actions as required.

Positive Net Material Inflation (NMI)

In the previous quarter of FY25, the company observed a positive NMI indicating an increase in the total costs of the business. The company continues to adjust prices according to the change in NMI. These changes are seen in its price growth pattern in the third quarter. It aims to give good value to consumers. 

Performance of the company

In the midst of a rise in pricing, the company’s income was Rs. 15,195 crores. It highlights the sales growth of 2 percent driven by pricing and the volume growth has stagnated. Despite of the inflationary and other pressures, the company gave health gross margin growth of 50 percent and EBITDA was around 23.4 percent, marking it successfully in the company’s expected range of 23-24 percent. The company recorded PAT (Bei) growth was flat YoY. While, the EPS of the company surged to 19 percent due to divestment of Pureit business. The company’s income is supported by more than 80 percent of its sales from products which are considered to be better than its peers. More than 95 percent of the products in the portfolio used the strategy of unmissable brand superiority framework.  The company recorded a lower tax rate considering divestment of Pureit is around 26.8 percent (24.6 percent without consideration of divestment) in the 3QFY25. It is projected to be around 25.5 percent in the upcoming quarters. In terms of absolute volume growth, the company has an edge against its peers. The reason for subdued growth was due to few segments receiving a slowdown in demand. The company recorded a slowdown in growth in its Home Care segment.

Focus on Core brands

• Glow and Lovely- It has a strong position in the market. Recently, the company has launched a new product of Glow and Lovely known as Glass Bright Gel. All the 6P’s of marketing are followed while launching this product.
• Rin and Sunlight-HUL also relaunched Rin Bar with a super formula using novel polymer technology which makes it longer than its competitor’s product. It has resulted in slight rise in the market share. Sunlight is a 130 years old brand of HUL. The company promoted it through Durga Puja in Kolkata.
• Moti Soap- In the last two years, Moti has become the first brand to be marketed through digital platforms. It resulted in the highest growth of the market share of the brand.

New Launches

• The company launched Dove’s two new products- serum shower collection and scalp plus hair therapy. 
• Lakme launched its Rouge Bloom collection through social-first media campaigns, Lakme fashion week, e-commerce, large-scale out-of-home media deployment and offline promotions.
• TRESemme launched Silk Pressed range through first-of-its kind social-media and partnership with e-commerce, salons and professionals.
• Knorr brand expanded its Korean products through launching Spicy gochujang and also aligning with Squid Game 2 for marketing campaigns.
• Horlicks launched Strength Plus.
• To expand its liquid market, the company launched Sun, a dishwash liquid brand which costs Rs. 99 per Liter.

Segment-wise Performance

• Home Care- It is the biggest operational segment of the company. Its share in the total revenue is around 37 percent. The segment recorded growth in sales by 6 percent aided by high volume growth in single-digit. The performance in the segment was strongly driven by the broad base product portfolio. HUL recorded a double-digit surge in its liquid portfolio. In the third quarter of FY25, HUL relaunched Comfort. The company registered a robust growth in its leading diswash segment supported by being an essential commodity. The firm has decided to diversify its product range by adding Sun liquid dishwash and Vim surface cleaner. 
• Beauty & Wellbeing- It contributes around 22 percent. The performance of the segment was adversely affected by delayed winter leading to subdued growth of 1 percent YoY. Hair Care achieved a mid-single digit in volume growth. The reason for this is increased demand for sachets, mainly premium shampoo sachets and also new and innovative products of the company. The company’s new innovative products include masks, conditioners, and serums. In contrast to this, skin care and colour cosmetics faced a slowdown in growth due to delayed winter and poor performance of mass skin products. While, the non-winter skin related products performed well. 
• Personal Care- Its share in the total revenue of the company is about 15 percent. In this quarter, the company recorded a contraction of 4 percent in the segment due to low demand of hygiene related skin cleansing products. Despite this, the company saw continued progress in the skin cleansing segment compared to its peers due to its strategic actions, and good performance of non-hygiene related products. The company has taken into consideration to relaunch Lifebuoy. In midst of this, the company hit a robust double-digit growth in its leading bodywash segment. Supported by the performance of close up in the market, oral care registered a mid-single digit growth.
• Food- The share of the Food segment in the total business of the company is about 24 percent. The revenue from the segment continues to be stable. However, the volume growth observed contraction leading to mid-single digit growth. Tea portfolio recorded low-single digit growth due to pricing strategy. The premium brands like Taj Mahal, and 3Roses gave a strong performance. The double-digit growth was observed in the coffee segment impacted by pricing strategizing and outperformance by new products. The nutrition drinks products were successfully able to gain both volume and value share compared to its peers. HUL has decided to expand its portfolio in terms of nutrition drinks for all age groups. The mid-single digit growth in packaged foods division was recorded mainly driven by strong sales in new and key product portfolios. The products like mayonnaise, ketchup, international sauces, and cuisines remain popular among consumers. Revenue from ice cream division was registered to be flat on YoY basis. Contrary to this, Food Solutions’ sales recorded a double-digit growth. 

In all the segments, the company recorded health margins – Beauty & Wellbeing (29%), Home Care (18%), Personal Care (18 percent), and Foods (20%).

Strategic Decision

• Divestment of water business- The sale and divestment proceedings of Pureit was completed on 1st November. 
• Demerge of Ice Cream Business- The company has decided to demerge Kwality Wall’s (India) Limited. As per the arrangement,  for each equity share of HUL will receive one equity share of the new entity. This demerger is projected to help the company to have robust growth and development in its business model and market position.
• Acquisition of Minimalist- The premium brand, Minimalist was founded by Mohit Yadav and Rahul Yadav in the year 2020. It is one of the fastest-growth brands on the digital platform for the first digital brand. The company has successfully managed to reach INR 500 crores of revenue growth in a short period of 4 years. It is one of the few brands to remain popular since its launch.  It helped to strengthen HUL’s e-commerce presence and HUL will also launch in the offline segment. Further, minimalist has a presence in some international markets as well. HUL can use its global presence to increase the scope of the business in the international market. HUL will acquire about 90.5 percent of stake in the company at a pre-money enterprise value of Rs. 2,955 crores with the use of both secondary buyout and primary infusion. The  balance stake of 9.5 percent will be acquired in the upcoming 2 years. The transaction is anticipated to be closed in the first quarter of FY26.  This acquisition will aid the company to 900 basis points of growth in the Beauty and Wellbeing division in the upcoming few years and also address the gap of under indexation of premium products in this division.
• Acquisition of Vishwatej Oil Industries Private Limited- It aims to acquire with the aim to build strong infrastructure and supply chain for palm under the National Mission on Edible Oils of India.

Future Outlook

HUL expects the current subdued demand trends to remain in the upcoming future as well. The company continues to keep an eye on different macroeconomic indicators like real wage growth, food inflation, and employment levels impacting the growth of the economy. The company focuses on having volume-led growth compared to its peers with a major focus on diversifying and developing the portfolio of the company. In case of continued price range of commodity prices in the upcoming quarters as well, the company is projected to record a low single-digit growth. In the scenario of elevated prices of material required, the EBITDA is projected to be in the lower range of 23 to 24 percent. The company’s focus is to increase its premiumization, strategic acquisition, and launching new products in the market. 

Valuations

In present times, the stock of  Hindustan Unilever Limited is trading at multiple of 51.1 x  45.7 EPS at the CMP of Rs. 2,250. In book terms, trading  10.4x than its book value of Rs. 216.  As of today, the ROCE and ROE of the company is at 27.2 percent and 20.2 percent, respectively. The company recorded net profit due to strong sales in Home care segment which partially offset the negative performance in the other segments.

Investment Rationale

• Historically, FMCG sector in India is considered as the defensive sector. The rise in disposable income, growing young population, expansion in rural consumption will accelerate growth in the FMCG sector.
• In last quarters, FMCG sector underperformed in the situation of subdued demand and narrowed down margins. Inflation in commodity prices led to higher input costs which in turn put burden on margins of FMCG companies. In order to relieve pressures on margins, many FMCG companies raised their pricing. It resulted in contraction in consumer demand in the sector.
• In the recent times, the economy and FMCG sector is adversely affected by subdued urban consumption demand and elevated material prices. In contrast to the urban demand trend, rural demand in India is in its recovery phase. FMCG sector recorded shift of consumers towards small packs more than large packs. Despite this prevailing situation, consumers are inclined towards premium products in different segments.
• FMCG firms are focusing on premiumisation of their product portfolio to accelerate demand at urban level. The consumption trend in urban areas indicate people preference for high-end products in the midst of expansion in growth of quick commerce.
• In the year 2024, the inflation in commodity prices affected non-essential spending of the consumers. There is possibility of inflation acting as a challenge for the recovery of urban demand. It is likely for the action of shift towards premium products by FMCG players to suffer due to rising inflation.
• In the month of December 2024, MPC of RBI projected Consumer Price Inflation (CPI) as 4.8 percent in the financial year 2025. Earlier, it was estimated to be 4.5 percent. It highlights the expansion in the inflationary burden in the upcoming financial year as well.
• In the Budget 2025, the government of India announced tax relief to income up to Rs. 12.75 lakh with the aim to accelerate consumption demand in the country. It is expected to positively impact consumption-driven business in the economy. Apart from this, the Budget also empowers manufacturing and rural infrastructure of the country through National Manufacturing Mission and various initiative for rural regions. It will lead to self-reliance, better cost efficiency, expansion of domestic production, employment, market expansion, higher consumption, and development.
• Agriculture, manufacturing, and consumer expenditure are the three crucial pillars for the progress of the FMCG sector. This initiatives for development of these pillars will lead to high growth and better opportunities for transformation will take place in the FMCG industry.
• Large FMCG player like Hindustan Unilever was able to get advantage from recovery in rural demand due to its substantial presence in rural areas. Additionally, rural market is not impacted by the competition in the quick commerce businesses.
• The latest report of NielsenIQ states that the premium and luxury products of FMCG are recording a remarkable growth in spite of the prevailing issues in the sector. The high-end products are able to gain strong growth compared to mass products in the market indicating a transformation in the consumer sentiments.
• The contribution of the high-end products in the total sales of FMCG products is about 27 percent and it led to value growth of 42 percent in the sector. The crucial factors leading to this trend are urbanisation, higher income levels, growing preference for high-end products, expansion in use of smartphones.
• Despite the rise in prices of high-end products, demand for it is increasing at double rate indicating shifted preference for value over cost in the consumer sentiments.
• Unilever expects improvement in the demand condition in the Indian economy in the mid-term due to the recent implementation of fiscal and monetary incentives. HUL share in the global revenue of Unilever is more than 10 percent.
• Unilever aim to invest capital in order to expand growth in the beauty and wellbeing segment. HUL steps towards acquiring Minimalist indicates its following of strategy to bring growth in beauty and well-being segment.
• The overall FMCG market (where HUL participates) is around INR 1,70,000 crores out of which INR 68,000 crores is contributed by the beauty division itself.  The contribution of affluent beauty divisions in the beauty market is around 50 percent and its pace of growth is double the growth of the beauty market. In addition to this, the range of premium products purchased by consumers in India is in line with the other developed countries in the world. The total per capita expenditure on beauty in India is remarkably lower compared to the rest of the world. It signals higher chances of opportunities for the premiumization of the beauty market.
• Additionally, HUL focuses on demerger of Kwality Wall Ltd. , acquisition of the Minimalist and Vishwatej Oil Industries, and expansion of product portfolio of the company.

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