Q3 results: HUL growth off a high base shows it’s on a roll

Premium valuations notwithstanding, shares of Hindustan Unilever Ltd (HUL) have gained 11.5% after it announced its September quarter (Q2) results, compared to a 4% rise in the Nifty. HUL Q3 results should help maintain the positive momentum. Volumes during the December quarter increased 10%. This is the fifth consecutive quarter of double-digit growth, commendable considering the growth comes on a high base. Growth in the earlier four quarters was aided by demonetisation and goods and services tax (GST) disruptions in the base year.

Revenue growth stood at 11.3%. Excluding exports, the 13% growth in the domestic business slightly lagged some estimates, reflecting lower-than-expected price realizations. Analysts had assumed price hikes during the quarter were higher. Even so, that does not amount to a major upset.

Importantly key business segments continue to see good growth momentum, helped by steady demand from rural areas and growing sales of premium products. Home care—which includes the detergents business and accounts for close to a third of HUL’s overall revenue—grew by 14.8%. Beauty and personal care—which generates nearly half of overall revenues—grew 11%, primarily driven by premiumization of the product portfolio. The food and refreshment segment also did well, registering a growth of 9.9%.

The healthy growth in volume and cost rationalization measures helped the company expand its profitability margins by 170 basis points to 21.4%. Raw material costs, while volatile, have eased towards the end of the quarter. One hundred basis points equal one percentage point.

The management said the demand environment should be stable in the near term, with its focus remaining on volume-led growth. The government’s focus on rural areas and the expected thrust to rural spends ahead of the elections should aid HUL. Approximately, 40% of the company’s revenue comes from rural areas.

Further, the amalgamation (expected to be completed in the coming quarters) of GlaxoSmithKline Consumer Healthcare Ltd should give a fillip to HUL’s foods business, providing a significant growth lever.

For investors focused on the earnings trajectory in the near term, much will depend on raw material costs and how HUL handles them. While crude and palm oil rates eased from the highs in 2018, prices of other consumables used in tea and toothpaste have remained firm.

Another key factor to monitor will be the price-volume equation. While the company has managed this fairly well in recent quarters, the seeming lack of pricing power may cause some concern among investors.