Graphic: Mint
Graphic: Mint

The questions the HUL Q1 results will answer

For HUL, rural demand will be a key determinant of how much volume growth improves in FY19

Hindustan Unilever Ltd (HUL) on Monday will report its June quarter results. The numbers and management commentary should give investors an idea of what lies ahead in FY2019. Here are some questions its results could have answers for:

Is rural growth powering up and what about urban demand?

Rural markets for FMCG goods are seeing improved demand. But HUL had stuck to its cautious tone after the March quarter results, saying that trends will become clearer later. It confirmed rural demand is ahead of urban growth, but not across the country. After a quarter, the change in its commentary on this front will be watched closely. Rural demand will be a key determinant of how much volume growth improves in FY19. Urban demand seems to have hit a slow patch, with the focus on getting consumers to buy premium products.

How will the last quarter of a really low base effect look like?

The goods and services tax roll-out had seen HUL’s volume growth go flat in the June 2017 quarter. This low base effect will result in an artificially high volume growth. How high it goes will give some indication of where it may settle at, in the coming quarters and full year. From Q2 onwards, growth should normalize as the base effect will wane. The June quarter’s growth was at 11%, again due to a low base effect.

Can pricing power make a comeback in fiscal 2019?

Inflation is trending up but FMCG product prices have been kept in check. The June 2018 core Consumer Price Inflation index rose by 6.16% in June compared 3.94% a year ago. But a year after GST, a consumer’s shopping basket at MRP is roughly equal to its year-ago level, according to a Mint report. While profitability has still risen, partly from savings due to GST, companies have been wary of attracting scrutiny under the anti-profiteering law. Rising inflation does set the stage for having sufficient reason to increase prices. The HUL management’s commentary on pricing is critical.

Can profitability improve further from these levels?

The answer to this question draws upon answers to the earlier questions. If HUL’s volume growth remains high, then that itself can be a reason for better profitability. But inability to pass on cost increases can deal a blow. In addition, tough competition and the extent to which it has to spend on advertising and promotions will also determine how profitability changes.

How long can Hindustan Unilever Ltd’s dream run on the bourses last?

Since mid-May, when HUL’s March quarter results were declared, its shares are up by 16% since the start of 2018 and are up by 54% over a year ago. Its shares are trading at eye-watering valuations of 60 times its estimated FY19 earnings per share and 53 times its FY20 EPS, based on a mean of estimates compiled by Reuters. Since consumption is the reigning theme, and investment not making its mark yet, FMCG stocks such as HUL are in demand.

But earnings growth has to justify this level of valuations, which is another question that investors will turn their attention to in the coming quarters. Within the consumer pack, ITC Ltd was seen as a strong alternative to HUL. If ITC’s results indicate the worst is over for its cigarettes business, it could see investors shift partially to hedge their bets. If that happens, then HUL will lose some of its premium.

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