HUL can expect 1.2% margin recovery over next three years: Emkay Global

Hindustan Unilever growth: After a series of quarters with muted growth, Hindustan Unilever can expect a limited 120 basis point gross margin recovery in the next three years due to focus on topline growth. 

Domestic brokerage firm Emkay Global believes that the fast-moving consumer goods (FMCG) giant may face dampened near-term performance, but over the span of three years (FY24-FY27), the company can record around 8 per cent growth in sales. 

“Focus on topline will limit margin recovery – we build-in 120 bps margin recovery over next 3 years,” Nitin Gupta, Senior Research Analyst wrote in the post-earnings report on HUL. 

On Tuesday, the company reported a 2.7 per cent rise in the standalone net profit to Rs 2,538 crore for the first quarter of the current fiscal (Q1FY25) along with a 1.3 per cent rise in its revenue from operations.  

The brokerage firm stated that the company’s Q1 results are broadly in line, with better volume growth – at 4 per cent. “On enhanced execution, we lift target valuation multiple, from 55x to 58x,” wrote Gupta.

Clear focus on boosting top-line growth

The company is focusing on improving its gross sales which grew by around a per cent in the last quarter. With better products and harvesting the growth of premiumisation of consumption patterns, the company is targeting to revive its topline growth.  

“Management attention ahead would be on reviving topline growth, for which it has devised a strategy to focus on 4 pillars (product superiority, thrust on premium portfolio, reshaping portfolio in high-growth spaces, channel for the future),” the report stated. 

Emkay Global also believes that improved supply chain synergy can be one of the key things that can drive margin growth in the coming quarters. “On the margin front, the management sees modest improvement owing to i) mix improvement, ii) operating leverage, and iii) actions in the Horlicks portfolio (supply chain synergy),” the Senior Analyst wrote. 

Push to Premiumisation 

A swift shift in the spending patterns of Indian consumers and a growing trend of choosing premium experiences has been the point of chatter for brands across all sectors. The FMCG industry has repeatedly cited urban consumption to drive this demand and is working towards expanding their premium portfolios. 

The top management of HUL has stated that premiumisation remains an important theme for the company, which focuses on tangible benefits in products. The company’s premium portfolio has seen expansion of 300 basis points over the last three years. 

Premiumisation becomes a key factor for a company's profitability as the products have juicier margins.

Lakme, Dove, Bru Southern Trails, Comfort, Ponds, and Cornetto are key brands that drive HUL’s premiumisation venture. The company has also recorded a double-digit growth in ice cream in the last quarter due to scorching heat waves. 

Home care liquids, beauty products, body washes, and make-ahead international cuisines are among the key growth drivers for the company’s high-growth portfolio. Personal care saw a 5 per cent decline, with low single-digit volume growth.