HUL misses revenue estimates, indicating rural headwinds
Hindustan Unilever’s sales by volume grow by just 4%, but analysts say given market conditions, firm hasn’t done too badly
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Mumbai: Hindustan Unilever Ltd (HUL) on Monday reported anaemic sales growth in the three months ended 30 June, missing analysts’ revenue estimates by around 6%, indicating that an expected recovery in rural demand is yet to take root.
HUL’s sales by volume grew by just 4% in the fiscal first quarter, the country’s largest packaged consumer goods maker said.
Net profit rose 9.8% to Rs.1,173.90 crore in the three months ended 30 June from Rs.1,069.16 crore a year ago. Net sales by value rose 3.57% to Rs.7,987.74 crore from Rs.7,712.71 crore a year-ago
HUL was expected to post a stand-alone profit of Rs.1,147.60 crore on sales of Rs.8,518.70 crore, according to a Bloomberg poll of analysts.
“The business continued to track ahead of market with sustained margin improvement. Domestic Consumer business growth was at 4%, with 4% underlying volume growth and operating margin expanded by 70 bps (basis points). The growth was broad-based across the segments,” the company said in a statement.
One basis point is one-hundredth of a percentage point.
Shares of HUL closed 2.04% lower at Rs.920.45 on the BSE on a day the benchmark Sensex fell 0.32% to 27,746.66 points.
HUL, the maker of Lipton tea, Lux soaps, Pepsodent toothpaste and Wheel detergent, and other packaged consumer product makers are trying to reverse a slowdown in rural demand following two years of drought that hurt farm incomes.
A bountiful monsoon predicted by weather forecasters this year is expected to fuel rural demand, but firm signs of a recovery haven’t surfaced yet.
A decline in commodity prices—which too started rising in the last quarter—and urban consumption growth has offset the rural slowdown, but only partially.
“It’s been a challenging quarter and the market growth has further slowed down, both in volume and value. We have faced high commodity costs in the quarter and competitive activity continued to remain high,” chief financial officer P.B. Balaji told reporters in Mumbai.
In the near term, the market is likely to remain muted, said Balaji.
HUL said it’s using the slowdown to improve efficiencies and drive profitable growth, and preparing to expand its production.
“In slowing market conditions, the business is tracking ahead of the market with sustained margin improvement. We continue to make progress on our priorities of strengthening the core of our business whilst driving operational efficiencies. While the near term market growth is likely to remain muted, we are optimistic for the medium term and remain focused on driving competitive and profitable growth,” said chairman Harish Manwani.
The company proposes to invest Rs.1,000 crore to set up a new manufacturing plant within its existing factory premises in Doom Dooma, Assam. HUL also intends to encourage suppliers to establish units in the vicinity to manufacture packaging material.
The wider consumer packaged goods market by volume either contracted or was little changed in the fiscal first quarter, said Sanjeev Mehta, chief executive officer, HUL, setting it against the company’s 4% volume growth.
Analysts seemed to agree that given the market conditions, the volume growth wasn’t too bad.
“Demand has deteriorated in the last six months and this will be reflected in all consumer companies’ numbers. So 4% is good in this context for HUL as it has held on to volume growth,” said Abhijit Kundu, senior analyst, consumer, Kim Eng Securities India Pvt. Ltd, who tracks the company.
A good monsoon will be critical for the sector’s growth revival, he said.
After a late onset in Kerala and a staggered advance across the country, the monsoon ended June with a deficit of 11%. But heavy rainfall in July rapidly shrank this deficit to the point where the country now has an overall surplus in the season so far.
What augurs well for HUL and other consumer products makers is that price inflation is coming back, which could give
value growth in the coming quarters.
“The commodity cycle has bottomed out,” said Balaji, adding that the magnitude of price deflation had lessened and had no impact in the quarter.
At a board meeting on Monday, HUL proposed to divest its stakes in a two decade-old joint venture—Kimberly-Clark Lever Pvt. Ltd—to its partner Kimberly Clark Corp. The decision is in line with its objective of focusing on its core business, said the company.
The company also announced a change its management committee as Punit Misra, executive director and vice-president, sales and customer development, resigned to pursue an external opportunity.
Misra was replaced by Srinandan Sundaram, 41, currently vice-president, skincare, who has been with the company since 1999, when he joined as a management trainee.
The change will be effective from 1 September.