Hindustan Unilever Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Volume recovery underway but uneven: Three-quarters of the business (Home Care, BPC) returned to mid-single-digit volume growth, while Foods & Refreshment declined on tea downgrading and commodity-led pricing.
• Gross margin rebuilt, now reinvesting: Gross margin recovered 400 bps YoY to 50.6%, but A&P surged 270 bps and other expenses rose 120 bps as the company reinvests behind brands, innovation, and capabilities.
• Beauty & Wellbeing separation signals a strategic bet: From April 2024, BPC splits into two independent units, with a mandate to build an end-to-end beauty company and unlock higher, margin-accretive growth.
• Competitive intensity rising in mass segments: Small and regional players have returned as commodity costs eased, slowing HUL's pace of market share gains, though the company is holding nearly all gains from the inflationary cycle.
• What to watch next quarter: Whether the business winning metric dips below 60% as guided, the pace of F&R volume recovery as commodity prices moderate, and the margin impact as ~INR300 crores of GSK portfolio income drops away.

Demand & Volume Recovery

• Rural demand is resilient but not yet strong: Rural 2-year CAGR turned positive at +1%, up from -1% last quarter, despite cumulative inflation, uneven monsoon, and wage growth lagging FMCG inflation. Management flagged winter crop yields and rural income growth as the key determinants of the pace of recovery.
• Urban and premium are doing the heavy lifting: Urban growth outpaced rural, Modern Trade outpaced General Trade, and the premium portfolio grew at more than 2.5x the mass portfolio. Premium Beauty, Horlicks Plus, and premium Laundry all grew in strong double digits.
• Winter categories disappointed: A delayed and less severe winter hit the winter portfolio, which makes up 30% of Skin Care. Management noted January offtakes improved and channel inventory is not a concern.
• Tea downgrading persisted: Consumers continued shifting from branded tea to loose tea, with no timeline given for when the trend will abate. This dragged F&R volumes into low single-digit decline.
• Near-term outlook is cautiously optimistic: Management expects gradual demand recovery, aided by government spending, better winter crop sowing, and improved crop realizations. Price growth is expected to be marginally negative in the March quarter if commodities stay where they are.

Tiwari: "If I add all these 4 macro realities, and then if I look at number of a rural, which is 2 years CAGR, as we speak this quarter, plus 1, I think this could have been more worse. So, market is pretty resilient."

Competitive Dynamics & Market Share

• Regional players are back: As commodity costs eased, small and regional players who had vacated the market during peak inflation re-entered, particularly in mass detergent bars. HUL's pace of incremental market share gains slowed, but the company is holding on to almost all the gains made in 2021 and 2022.
• Detergent bar actions deployed: HUL has taken corrective actions in the marketplace (grammage fill-back, price correction, trade input corrections) and is already seeing recovery in market share.
• Business winning metric to dip, then recover: The width measure (business winning share) stood at 60%+ on a MAT basis but is expected to dip below 60% for a couple of quarters as it laps a high base, then work back to 60%+ in the second half of calendar year 2024. The depth measure (corporate value market share) is holding at a 200 bps gain.
• Full-cycle view is favorable: Over the full inflationary-to-deflationary cycle in mass detergents, HUL gained market share on a net basis. The 30% of business at lower price points has remained stable before and after the cycle.

Tiwari: "But it is important to note that we're holding on to almost all the gains made in 2021 and 2022."

Beauty & Wellbeing Separation

• A structural bet on specialization: From 1st April 2024, BPC splits into Beauty & Wellbeing (Skin Care, Premium Beauty, Hair Care, Color Cosmetics, Health and Wellbeing) and Personal Care (Skin Cleansing, Oral Care, Deodorants). The move follows Unilever's global separation two years ago, which HUL did not adopt at the time. Rohit Jawa took the call, citing the need for specialization given different business models, innovation rhythms, competitor sets, and clock speeds.
• Building an end-to-end beauty company: The ambition is to create a distinct beauty company within HUL, with a portfolio spanning mass to premium prestige. The mandate is to increase growth, enter faster-growth demand spaces, and become a best-in-class beauty unit. Higher growth here is expected to be margin-accretive for HUL.
• Twin-engine strategy, not either/or: Management emphasized this is an "and and" approach: building a specialized beauty unit while continuing to leverage the scale and efficiency engine of the rest of Unilever for Personal Care.
• Prestige portfolio on the horizon: A prestige play is expected to enter the portfolio at some point in the future to complete the full portfolio.
• Digital-first brands gaining traction: Simple and Love Beauty and Planet are showing encouraging signs, and the premium beauty business unit has crossed an INR 100+ crores ARR milestone. The company has developed a playbook to scale digital-first brands from 0 to 10, 10 to 100, and 100 to 1,000.

Jawa: "So it's a twin engine thought. We will be doing 'and and' not just one or the other."

Margin Walk & Investment Cycle

• Gross margin rebuilt, now the reinvestment phase: Gross margin improved 400 bps YoY to 50.6%, recovering a large part of the margin lost during the inflationary period when HUL did not price to the full extent of commodity increases. The first priority is to close the remaining ~200 bps gap to pre-COVID levels.
• A&P spend surged: A&P investments rose 270 bps YoY to 10.7% of sales, with absolute spend up ~INR400 crores. Drivers: accelerated innovation (especially premium), competitive heat in media, and investments to maintain share of voice ahead of share of market.
• Other expenses also up: Other expenses rose 120 bps YoY to 16.3%, with ~50 bps from a royalty increase and the rest from investments in future-fit capabilities, phasing of costs, and lack of top-line leverage. Full-year other expenses are expected to be circa 13% of turnover.
• Segment margins dipped sequentially: Home Care margins fell 100 bps QoQ and BPC margins fell 150 bps QoQ, driven by investments in trade promotions, product quality, and A&P.
• GSK income headwind looms: The GSK contract continued through November plus an early termination fee, so other income was similar to prior quarters. From 1st January, that ~INR300 crores annually goes away, creating a margin headwind that management plans to offset gradually through net productivity, not all in one quarter.
• Medium-term margin ambition is modest improvement: Management wants to maintain EBITDA margins at current healthy levels (23%-24% range) while dialing up investments. EPS growth is expected to be driven by top-line growth, with only modest margin improvement over the medium to long term.

Horlicks & Health Food Drinks

• Structurally attractive, near-term consumption challenge: HFD is growing market share handsomely and EBITA is ahead of where it was at acquisition. But core Horlicks volumes declined low single digit as consumers dropped consumption in response to the combined inflation shock of higher Horlicks prices and higher milk prices. Penetration is improving but consumption per user is not yet recovering.
• Not a premium problem, a market development job: Management framed Horlicks as a market development and relevance-increasing challenge, not a premiumization play. Annual penetration is sub-40% even in strong southern and eastern markets, and very low in the north and west. The Plus range (clinically supported, sold in pharmacies) is showing high growth.
• Recovery levers identified: Stabilizing or softening milk prices should help. The proposition is being sharpened around "taller, stronger, sharper" to increase relevance with mothers. Focus is on driving consumption in winter and monsoon occasions. Geographic or segment expansion will wait until the core relevance job is done.

Jawa: "I will not qualify this as a premium game but more as a market development, a relevance increasing job to do."

Distribution & Organizational Changes

• Distribution margin structure overhauled: A new incentive structure has been rolled out to the top 100 cities over three months. It incentivizes distributors to sell more, service more stores with next-day delivery, and sell more lines (especially premium and market development lines). The model was tested for a year with favorable results: better-served kirana stores, higher distributor earnings, and stronger sales growth. The transition went well with no adverse impact.
• Chief Digital Officer appointed: A new CDO will program-manage the "reimagine HUL" program, covering digitization across customers, supply chain, and marketing.
• Investor Relations transition: Shilpa Kedia (currently heads M&A and treasury) will take over as Group Controller and Head of Investor Relations. The current IR head, Ravi, moves to Head of Finance for the new Beauty & Wellbeing segment.
• Segment reporting to change: From the June quarter 2024, HUL will report four segments instead of three, reflecting the BPC split into Beauty & Wellbeing and Personal Care.

Jawa: "So all in all, it made a lot of sense as a win-win-win to take this then to our big cities where this is important."

Guidance & Commitments

Key Metrics