The impact of the tough macro was evident as HUL reported flat volumes and a sharp decline in GM (7Y low), but overall results are still better than JEF/consensus forecasts. Home care momentum remained strong while BPC was again tepid. The outlook on margins is tough as mgmt expects a yoy drop in margins in the next 2-3 quarters, after which there should be recovery. Mgmt is also hopeful of a rural recovery, though timing is uncertain. Retain Buy on a 12M view.

Slight EPS beat: HUL’s Q4 EBITDA grew 10% yoy to Rs 32.5 bn, 2% above est. This was led by a slight revenue beat (+10%), lower ad spending, and better cost control, which offset a sharper-than-expected decline in gross margin. Revenue growth was entirely price-led as volumes were flat yoy, although better than the JEF and consensus estimate of a decline (1-3% yoy). Grammage reduction in price point packs (~30% of portfolio) had a 2-3ppt adverse impact on volume growth.

Portfolio: Home care continued to outperform (+24% yoy). BPC grew 4% yoy. F&R growth was muted (+5% yoy).

Sharp GM cuts: After a slight qoq recovery in Q3, input cost inflation accelerated again, leading to ~3ppt qoq/yoy GM decline to 48.5%, the lowest in 7Y. This was despite ~10% growth in realisations, which suggests >15% inflation in the RM basket. Mgmt highlighted 20-60% yoy inflation in inputs (crude, palm, plastics & soda ash).

EBITDA margin: Despite a sharp GM miss, EBITDA margin contraction was contained at 30bps yoy, to 24.1% (in line). This was on the back of a 9% decline in ad spending. Furthermore, HUL demonstrated strong cost control, reflected in employee costs (+4%) and other expenses (+7%).

Hopeful on rural: Mgmt noted that due to high inflation, households have become more value-seeking, and are prioritising essentials and titrating volumes. This is reflected in c.8% decline in FMCG market volumes in Q4, with rural more impacted than urban. While the demand environment remains challenging, HUL is hopeful of a rural recovery led by good rabi harvest/monsoon, higher agricultural prices, and government support. However, the timing of a recovery is still uncertain.

ST margins: RM inflation is accelerating further and the recent palm export ban by Indonesia further adds to the volatility. Mgmt is, however, confident of recouping margins over time. Apart from product price hikes, HUL is focusing on better efficiency, lightweighting packaging, and introducing bridge packs for LUP portfolios.

Retain EPS est.: We largely retain our FY23/24e EPS estimates. We retain our 12M Buy, noting that the stock may be sensitive to near-term trends on input prices as well as demand-side factors, especially in rural India.