Overview
The FMCG (fast-moving consumer products) giant Hindustan Unilever experienced modest volume increase during the October–December 2024 quarter. Despite cost challenges and seasonality, earnings growth was unchanged, and urban demand remained unimpressive.

Q3FY25 Results see a muted growth
For the third quarter that ended on December 31, Hindustan Unilever reported a 19% increase in consolidated net profit. Due primarily to the extraordinary gain realized from the sale of its Pureit business, the company declared a consolidated net profit of Rs 2,989 crore, up from Rs 2,508 crore. Consolidated revenue increased from Rs 15,259 crore to Rs 15,559 crore during the quarter that ended on December 31 of last year. Due to a weak product mix and volume growth that fell short of forecasts, brokers cut their target price on HUL shares.

In Q3FY25, underlying volume growth (UVG) decreased. In some categories, premium segments increased faster than mass segments. Despite a mild winter, the high-margin skin care items underperformed, while the home care (HC) division—the largest segment with lower realization—grew faster than the firm as a whole.

An aggressive development throughout the liquid format and a robust portfolio propelled growth in the resilient category of HC. The product formulation adjustment (soap) is also paying off. Smaller packets sold well through general trade channels in both rural and urban areas, while organized trade expanded by double digits. Pricing and the better performance of major brands drove the rise of oral care.

HUL implemented proactive price increases that limited the erosion of its gross margins even while the prices of tea and palm oil continued to fluctuate. Despite inflationary and mix pressure, the EBITDA margin held up well during the quarter, despite the subdued sequential growth in ad spends.

Disinvestment to boost margins
The recently established B&W (beauty & well-being) category has seen fierce competition from cutting-edge direct-to-consumer firms. Against this backdrop, HUL has announced that it has acquired Minimalist, a high-end brand that operates in the rapidly expanding beauty industry.

For Rs 2,955 crore, HUL plans to purchase a 90.5% share in Uprising Science. The Minimalist brand is owned by the company. In two years, the remaining portion will be purchased. Regulatory clearances are required before the acquisition is anticipated to be finalized in Q1FY26.

Skin and hair care are the specialty of minimalist, and the digital-first company has successfully tapped into the growing wealthy beauty sector, which is one of HUL’s main areas of focus. With an annual revenue run rate of Rs 500 crore, it is among the brands with the quickest pace of growth.

HUL will use complementary skills, such as R&D and innovation, technology, offline expansion, global presence, and cost effectiveness, to expand the brand to greater heights, given the beauty market’s substantial headroom for development (low per-capita spend). The investment is anticipated to unlock growth and margin synergies in the upcoming year and will be a solid strategic match for HUL’s beauty portfolio.

Additionally, HUL announced that it has acquired Vishwatej Oil Industries’ palm business venture. In the long run, the backward integration will lessen the volatility of palm oil prices and enhance the supply of palm oil derivatives, a vital raw resource.

Future Outlook
According to management, the moderate urban trend in the near future is only temporary, while the growth in rural consumption will continue to be higher. The urban market’s growth rate will be influenced by employment levels, food inflation, and real wage growth. If commodity inflation persists, the low-single-digit price increase will continue in the foreseeable future.

HUL’s business foundation will be strengthened by strategic measures that will also influence the company’s future growth trajectory. While cost-cutting measures will support long-term, sustainable growth, divestitures will increase operational efficiency and streamline concentration on core competencies.

HUL will increase its footprint in high-growth beauty markets and take advantage of the secular trend of premium product growth by making a strategic investment in the B&W category. With more releases in the March quarter and increased innovation intensity, the business intends to increase its position in the premium segment by 900 basis points.

Market Sentiment
The stock is currently trading at 51 times its expected earnings for FY26, which is a decent valuation. We believe that a significant re-rating still depends on steady increases in domestic volume growth.

Brokers’ opinions on the massive FMCG company are divided. However, most broking houses have cut their target price for Hindustan Unilever shares after the earnings announcement since they think the company’s short-term prospects will be restrained because of urban weakness.
Reiterating its ‘buy’ recommendation with a price target of Rs 2,675 per share, Emkay Global stated that while the dismal near-term outlook is weighing down on valuations, comparatively stronger execution is projected to help HUL in its medium-to-long term performance.