HUL results today: Markets look for signs of post-demonetisation recovery

Analysts tracking Hindustan Unilever (HUL) expect both volumes and revenue to grow as consumer spending has normalized after the demonetisation impact

HUL has been increasing the prices of its soaps that some analysts expect will lead growth in HUL’s revenue. Photo: Mint
HUL has been increasing the prices of its soaps that some analysts expect will lead growth in HUL’s revenue. Photo: Mint

Mumbai: Markets are looking to India’s largest consumer goods company, Hindustan Unilever Ltd, for signs of complete recovery from the demonetisation shock that led to depressed consumer demand and severely impacted margins of all major FMCG firms in the third quarter ending December 2016.

HUL will report its fourth quarter earnings this Wednesday. A Bloomberg poll of 22 analysts estimates the company’s Q4 sales will be at Rs8,149.3 crore, up 2.56% year-on-year from net sales worth Rs7,945.66 crore. Another Bloomberg poll of 24 analysts estimate Q4 net profit to be at Rs1,084.9 crore, nearly flat from Rs1,089.59 crore from a year ago.

Analysts tracking the company largely expect both volumes and revenue to grow as consumer spending has normalised after the demonetisation impact. A report by equities brokerage firm IIFL, ‘HUL: Good Times Ahead’, dated 24 March, said the company should see 7.5% year-on-year (y-o-y) growth in Q4 sales after a 1.2% decline in Q3 as volumes grow 3.5%.

“Both volume and value growth (is) accelerating even from pre-demonetisation levels as pipeline issues in soaps are resolved and price growth accelerates,” IIFL said in its report, adding that the company has continued to add products to its portfolio with the launch of Baby Dove, extension of Ayurvedic brand Ayush, and launch of hair care brand Indulekha in north India.

HUL’s parent Unilever had said in its quarterly earnings that sales of its India unit had recovered from demonetisation, Mint reported on 21 April.

The company’s stock also rallied to a record high of Rs998.75 as the benchmark S&P BSE FMCG Index also rallied, Mint reported on 10 May. This rally came after the India Meteorological Department revised its monsoon forecast the previous day to announce that the country will receive above average rainfall during the monsoon. This forecast is an indicator of higher rural income and, consequently, more rural consumer expenditure.

HUL has also been increasing the prices of its soaps—the company’s largest business segment—that some analysts expect will lead growth in HUL’s revenue.

“We expect HUL’s domestic FMCG business to post 2% decline in revenues due to 5% y-o-y decline in underlying volume growth (UVG) and 3% price-led growth (aided by recent price hikes across categories, especially soaps),” a report by Kotak Institutional Equities Research, dated 6 April, said.

Equities brokerage Edelweiss Securities also said in its report from 7 April that HUL will see major recovery as “business is back to normal from consumer perspective”.

“We expect HUL to witness volume growth of 2% YoY on a base of 4% YoY (volumes dipped 4% YoY in Q3FY17 on a base of 6% YoY) helped by recovery in the on ground situation as consumption is back to predemonetisation level,” the report said.

In general, analysts say soaps, as a segment, will see growth in volumes as a market after declining for two whole quarters.

“We do not foresee any significant market share shifts, and HUL should grow largely in line with the market,” IIFL said in its report. “Soap industry is stabilising back as the price hike has largely been taken,” Edelweiss Securities said in its report. “Also as PFAD prices have seen a sharp increase which will help soaps pricing growth.” PFAD stands for Palm Fatty Acid Distillate and is a key raw material for soap makers.

IIFL also added that it expected more price growth in Q4 as compared to Q3 now that the market has largely absorbed price hikes in soaps and detergents as manufacturers increased the MRP or withdrew promotional offers.

However, one remnant of demonetisation for HUL is wholesalers who continue to buy less stock even six months after demonetisation. The problem is bigger in rural “deep interior” areas where consumer demand has not completely normalised and among larger wholesalers, IIFL said in its report.

“There still is some liquidity stress with large wholesalers and deep interior retail,” the IIFL report said. “Stock levels are not back to pre-demonetisation levels, although they have recovered from Q3 levels.” The report said that the stock levels may not return to normal as “it seems wholesalers and retailers are able to function at lower levels”.

But analysts pointed out that HUL has been working to combat lower inventory levels by increasing the reach of their direct distribution channel and bypass these wholesalers and retailers.

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