We conclude that the company’s disclosure levels are good and it boasts all-round sound financial health. We like HUL’s continued focus on 4 pillars – (1) growth segments (strengthen core brands, accelerate premiumisation and market development), (2) growth channels (large portfolio enables strong positioning across all channels), (3) growth engines (new marketing models, de-averaging opportunities using Winning in Many Indias i.e. WiMi, building future formats and benefits and leveraging M&A to expand portfolio) and (4) purpose-led brands (enable connection with customers).
Nonetheless, the near term outlook appears to be subdued, its growth strategy to be driven by GSK-CH integration, strong execution, driving M&A, and focus on solid cost savings initiatives.
Home Care continued to be the biggest contributor to EBIT growth (73% contribution to incremental EBIT in Financial Year 2020). Segment revenue grew 6% and EBIT grew 19% - driven by volume growth and premiumisation (Surf Excel and Rin liquids). The Beauty & Personal Care segment faced pressure given its discretionary nature – revenue declined 2%, EBIT grew 3%. Foods & Refreshment segment revenue grew 4% but EBIT was flat. The premiumisation trend expected to decelerate in Financial Year 2021 given the second order macro impact. However, a large portfolio of strong brands that straddles the price- benefit pyramid places HUL in a strong position to capture any potential downtrading.
Volume and Revenue Growth
Volume growth moderated to 2% since last year as the year was initially impacted by the slowdown in rural consumption (rural growth dipped 0.5 times urban growth) and then the very end of the year saw virtually no sales on account of COVID-19 lockdown. Revenue growth lagged volume growth on account of a deflationary raw material environment.
Balance sheet – healthy with improvement across metrics
Further improvement in working capital days: Net working capital improved further to negative 41 days of sales from negative 39 days in Financial Year 2019. Receivable days declined sharply by 6 days along with an increase of 2 days in payables; inventory was higher by 2 days.
Return ratios continue to improve: The RoE increased to 83.9% (from 79.9% in Financial Year 2019) led by 11% growth in net profit and broadly flat CAPEX of Rs 740 crore. Asset turns were slightly lower at 3.9 times while dividend payout (including DDT) increased to 92.7% (from 90.4% in Financial Year 2019). RoCE saw a marginal 20 bps since last year and improved to 62.8%.
Free Cash Flow up 34% since last year: Free Cash Flow for the year grew 34% since last year to Rs 6,560 crore driven by 17% growth in CFO (ex-working capital change), improvement in the working capital cycle while CAPEX was broadly flat. The Free Cash Flow conversion (as % of EBITDA) improved to 68% (from 58% in Financial Year 2019). The net cash surplus at the end of Financial Year 2020 was at Rs 6,761 crore.
Slowdown in the demand environment would result in moderation of sales volume growth.
Rupee depreciation impacts the price of raw materials which are imported.
Ad spends likely to spike due to increased competition from regional players and thus maintaining market share will also be a challenge.
HUL’s popular segments continue to face stiff competition, with the entry of new players, including multinationals which could hit the company hard.
Teji or Mandi?
HUL remains well-placed to tackle the current situation through agility, ability to leverage technology (‘Reimagining HUL’ takes additional prominence), and focus on getting closer to consumers and their needs (re-planning innovations, adjusting to consumers buying in different channels).
Therefore our take is Teji as we expect volumes and earnings to bounce back once the situation normalises.
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