HUL earnings show rural demand strain | Mint

HUL earnings show rural demand strain

Net profit climbed to  ₹2,552 crore for the three months ended 31 March from  ₹2,327 crore a year earlier, the company said in a statement to the stock exchanges on Thursday.  (Mint)
Net profit climbed to 2,552 crore for the three months ended 31 March from 2,327 crore a year earlier, the company said in a statement to the stock exchanges on Thursday. (Mint)


  • As inflation cools, HUL expects gradual uptick in rural demand
  • Net profit climbed to 2,552 crore for the three months ended 31 March from 2,327 crore a year earlier

NEW DELHI/MUMBAI : Hindustan Unilever Ltd (HUL), India’s largest household goods maker, reported a 9.6% increase in March quarter profit, missing analysts’ estimates, as inflationary pressures dampened demand, particularly in rural areas.

Net profit climbed to 2,552 crore for the three months ended 31 March from 2,327 crore a year earlier, the company said in a statement to the stock exchanges on Thursday. Sales rose 10.6% to 14,893 crore from 13,462 crore a year earlier, while costs rose 11% to 11,710 crore. A Bloomberg survey of analysts expected the company to report a profit of 2,605 crore. Surging inflation has cooled consumer demand in India, with rural areas and low-income groups more vulnerable to price hikes. HUL, however, expects volume growth to rebound as commodity prices soften and consumption habits adapt to higher costs.

Graphic: Mint
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Graphic: Mint

The company reported 4% underlying volume growth and a 7.5% value growth for the March quarter, although volume growth slowed slightly from the preceding quarter. HUL’s performance is viewed as a barometer for the broader Indian consumer sentiment.

On rural demand, Sanjiv Mehta, managing director and chief executive, said markets are showing signs of improvement. “It’s indicating that the depth of negative volume has reduced," he said.

For the consumer goods industry overall, quarterly volume in rural fell 3% year-on-year while improving sequentially, while for the full year, it declined 7%. While rural volumes continued to decline, the extent of decline reduced during the quarter, he said.

FMCG market growth showed gradual improvement with rural slowdown bottoming out; total FMCG market volumes which were declining earlier have now become flat.

During the March quarter, inflation moderated sequentially, although commodities still remained elevated versus the long-term average, Ritesh Tiwari, chief financial officer, told reporters during the company’s post-earnings call on Thursday.

Earnings before interest, taxes, depreciation, and amortization (Ebitda) for the March quarter stood at 3,471 crore. Ebitda margin stood at 23.7%. The company’s advertising and promotion spending grew 7.5% during the quarter but remained flat sequentially.

The near-term operating environment is likely to remain volatile, the company’s top management said. “Looking forward, the near-term operating environment is likely to remain volatile. With inflation easing due to the lapping of high base and sequential softening in a few commodities, price and volume growths will rebalance. Market volumes will recover gradually as consumption habits readjust," said Mehta, who will retire on 26 June.In the last two years, HUL increased prices by 18% while facing 30% net material inflation (NMI) in its portfolio. Mehta said, “We took a price hike of 60% of NMI." In the March quarter, net material inflation eased to 12%.

The easing of commodity prices allowed HUL to pass benefits to consumers via price cuts and increased package sizes, encouraging purchases. Mehta emphasized the company’s commitment to maintaining a price-value balance and not losing market share.

“We are very clear, just like we did not pass on the entire cost increase to the consumers, we are very cognizant, we have to maintain the price-value equation. And if the commodity prices go down, we will pass the benefit to the consumers. We are absolutely clear. We will not lose market shares," Mehta said. “If the country progresses, rural growth has to outpace the urban growth because they come from a low base. When your wallet size is smaller, the impact of inflation is much bigger. So once the inflation moderates, and in fact, deflates, and we are able to correct the price-value equation, I see no reason why the volume in rural will also not increase," he added. For the full year, the company’s sales grew 16% to 58,154 crore, with underlying volume growth of 5%. The company’s profit after tax stood at 9,962 crore. During the year, beauty and personal care brand Lux and Pond’s crossed 2,000 crore each in sales.While Surf Excel became the first brand in the company’s portfolio to cross $1 billion in sales, HUL, Mehta said, had 19 brands with sales of 1,000 crore each. HUL’s earnings were below our estimates on revenue and operating profit front, analysts at ICICI Securities said. “Major crude and palm oil-related commodities have come down significantly in the last six to eight months, which has resulted in sequential improvement in margins for the company. However, the extent of improvement is below our estimate. We believe the company is passing on the benefit of low commodity prices in terms of price cuts or grammage increase aggressively to perk up volumes," they said.

During the quarter, the company’s home care business reported segmental revenue growth of 19% from a year earlier. Meanwhile, the beauty and personal care business grew 10% with broad-based performance across categories. With softening in palm oil, further price reductions were taken in the soap portfolio.

However, food and refreshment grew at a weak 3%. The tea category witnessed consumers downgrading due to higher inflation in premium teas vis-à-vis loose tea. Foods grew in the mid-single digit, led by strong performance in ketchup and food solutions.

The company’s food and refreshment business reported weak performance due to price cuts taken in tea and downtrading in the category; the ice cream business suffered due to unseasonal rain. However, gross margins have started to expand, said Abneesh Roy at Nuvama Securities.

“We expect volumes to recover gradually due to high levels of cumulative inflation and the fact that consumption habits typically recover with a lag. In these circumstances, we will continue to manage our business with agility, to grow our consumer franchise whilst maintaining margins in a healthy range. Our focus is on ensuring the right price-value equation for competitive volume growth, building back gross margin and stepping up A&P investments," said Tiwari.

Shares of HUL fell 1.46% to 2,468.20 on BSE on Thursday, underperforming the benchmark Sensex’s 0.58% gain.



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