Home / Companies / News /  Govt  must  keep  tabs  on  inflation and underlying consumption: Sanjiv Mehta

Govt  must  keep  tabs  on  inflation and underlying consumption: Sanjiv Mehta

HUL chairman and managing director Sanjiv Mehta. (Photo: Mint)Premium
HUL chairman and managing director Sanjiv Mehta. (Photo: Mint)

HUL chairman and managing director Sanjiv Mehta said the firm is closely monitoring rural demand because market researcher Nielsen’s indicators showed that it has slowed down. However, HUL itself hasn’t seen a noticeable slowdown till the Sept quarter, he added

Hindustan Unilever Ltd (HUL) will try to maintain its operating margin within a band of 24-25% amid spiralling raw material prices through a mix of cost savings and calibrated price hikes, chairman and managing director Sanjiv Mehta said, terming the current input price inflation as unprecedented.

In an interview, Mehta said the company is closely monitoring rural demand because market researcher Nielsen’s indicators showed that it has slowed down. However, the company itself hasn’t seen a noticeable slowdown till the September quarter, he added.

A rebound in demand after the pandemic’s second wave helped the company raise prices to offset higher input costs. However, a demand slowdown may make it tougher for companies to effect price increases. Edited excerpts:

What do you attribute the lower-than-expected volume growth to?

First, I wasn’t saying that it was lower-than-expected volume growth. But let me give you a perspective. Historically, if you look at a long-term average, out of our total top-line growth, about 60-70% comes from volume, on an average, and 30-35% comes from price growth. Whenever the price growth accelerates, the volume growth comes down. The price growth that we take, we do it in two ways. One is, we increase the headline price, which is the MRP (maximum retail price). The second is we keep MRP consistent, but we reduce the grammage.

And we do this whenever there are price-point packs, say, those at 10 or 5—then you can’t change it to 5.50. So, you keep it and then reduce the grammage. Even when you reduce grammage, the consumer generally titrates his personal consumption based on the number of packs they buy (and not on grammage). So, if they were buying 10 (packs), they will buy 10. So, the volume growth goes down, but the price growth goes up.

Now, if you look on a sequential basis, last quarter (that is, Q1FY22), our volume growth was 9%. One must understand that in the base quarter, the volume growth declined 8% (June quarter FY21). If you look at it over a two-year period, you are doing a 1% volume growth. So, this quarter, our headline volume growth was 4%, but the base quarter was 1%. That’s the reason I said I’m not dissatisfied with volume growth. There’s a sequential improvement. One has to also take into account the base period growth.

How has inflation impacted the business?

If inflation in key commodities like palm oil, crude oil-based derivatives that we use in freight and the tea business was about 100 in 2020-2021, we are now talking about 1.6 to 1.8X. This is not normal inflation. In some of the commodities, inflation has been pretty much unprecedented. When you have this kind of inflation, then our endeavour always is that we should first protect the consumer franchise. We don’t want to lose consumers. The second important bit is, we look at all the lines of the P&L (profit and loss statement) to see where we can optimize cost or leverage more savings. Then we take the price increase in a calibrated manner and try to keep the price-value equation intact. And the third is, we keep the business model intact. Our Ebitda margin is very healthy at 25%, and our endeavour is to ensure they’re within 24-25%.

You keep referring to being ‘cautiously optimistic’ about rural.

If we look at pre-covid, rural growth had really slowed. Then during the covid period, rural became very resilient. Our hypothesis is that the government intervention also played a part—higher MNREGA, direct transfer of money, free foodgrain and MSP going up; all that played a part. Rural per-capita consumption is one-third that of urban. So, if India grows well economically, then rural should be growing faster than urban for many years to come—it’s such a small base.

But if rural stumbles, then it is a sign of a problem in the rural economy. So we monitor it very closely. But are we jumping to a conclusion? No. Are we raising a signal? Yes. Have we come to a conclusion? We say that wait and watch for a few more months what is happening to the rural economy because Nielsen indicators are indicating that it has slowed down.

But if you look at a two-year period between urban growth and rural growth, that is, 2019-to-2021, rural growth is not less than urban. But if you look at headline growth numbers between 2021 and 2020—then rural slowed down, which was very resilient till a couple of months back.

Did HUL’s rural growth mirror Nielsen numbers in the September quarter?

For us, our internal growth has been as good as in the previous quarters. So we have not had, till the September quarter, a noticeable slowdown. But more important is what we are picking up from Nielsen that is not for us, but for the market.

As economic activity resumes, what can the government do to lift consumption?

The best thing that happens for the economy is the virtuous cycle of growth. There is consumption, which spurs capacity investment, which then spurs more employment, and that spurs more money in the hands of consumers, it spurs more consumption, and that’s how the cycle goes. That’s the kind of cycle we, as a country, need. So, I’m very pleased when the government talks about more investment in infrastructure because that has a multiplier effect, and that results in consumption moving up.

The things the government should closely watch are two —one is inflation, and the second is the underlying consumption.

If you look at it from a macro perspective, we are in a position where we are saying that the economy this year will get back to the size of the economy of fiscal year 2019-20. Now, we will be one of the few large economies, which can say that we have gone back to 2019-20 levels, which is a very good sign. If this converts into momentum, and the economy keeps growing in real time at 6% to 8%, then we will be in a very good position. That’s the kind of growth we are seeking, and that’s the kind of growth the country needs. I’m still very optimistic that this will be our country’s decade.

You mention protecting consumer franchise, but inflation will affect demand.

It will. Volume growth will come down. If you reduce 10 grams from a bar of 100 gm, your volume growth comes down by 10%. It does have an impact because, at the end of the day, we are a business where 95% of households use one or more of our brands. We cater not only to higher SEC (socio-economic category) but to consumers across the spectrum.

On an overall basis, some modest inflation is healthy for the business. And if the inflation becomes high, then it does impact volume growth.

Are you seeing consumers down-trading?

Right now, we have not picked up down-trading of any significant scale. Our quarter has gone decent. When we saw the Nielsen market reading on rural growth come down, I thought it was important to flag it to the market. Now whether they will play out in the future, or was it just a base-effect, or was it something which is much more fundamental—we will have to wait and examine that.

How does HUL see itself participate in the direct-to-consumer or D2C play?

The D2C play or the entire e-commerce play is certainly bound to grow for the sheer convenience and assortment it offers. We have been building our e-commerce capabilities for the last five to six years. Today 15% of our total demand is captured through digital. For us, it is not just about the e-commerce capabilities; we’re also building digital-first brands.

We carved out a unit that is the premium beauty business unit. This is a business that is running in a very entrepreneurial manner. It is like our incubator, where you have the freedom and liberty to operate like a startup, but you have the resources of HUL. This is a team that has been entrusted to launch digital-first brands. It caters to the requirements of the digital natives. Even the remuneration that we set for them is different from the rest of HUL.

Then we also have our direct-to-consumer portals for existing brands—such as Lakme and Dermalogica. Lakme, for instance, 30% of its business is captured digitally. Lakme is the largest cosmetic brand in the country. But, of course, the journey has just commenced. This will keep growing—we will keep building capabilities and keep building muscles. We would want to remain the largest, even as far as digital play is concerned.

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