Hindustan Unilever Q4 results: The one-eyed king in land of the blind

There is a consumption slowdown in the country and Hindustan Unilever Ltd’s (HUL’s) March quarter results reflect that.

Still, in the land of the blind, the one-eyed is king. This may be apt to describe HUL’s volume performance. The fast-moving consumer goods (FMCG) company’s volume growth of 7% was better than its peers, and well within the expected range of 6-8%. On the other hand, Dabur India Ltd’s volume growth was 4%, missing Street expectations. Similarly, Godrej Consumer Products Ltd’s volume growth of 1% is rather poor.

There is a consumption slowdown in the country and Hindustan Unilever Ltd’s (HUL’s) March quarter results reflect that.

Still, in the land of the blind, the one-eyed is king. This may be apt to describe HUL’s volume performance. The fast-moving consumer goods (FMCG) company’s volume growth of 7% was better than its peers, and well within the expected range of 6-8%. On the other hand, Dabur India Ltd’s volume growth was 4%, missing Street expectations. Similarly, Godrej Consumer Products Ltd’s volume growth of 1% is rather poor.

However, the best news pretty much ends there for HUL. The company confirmed that rural demand, which outran demand growth of urban areas, is now slowing to grow at a similar pace as urban regions. “Perhaps, if things were improving in April, management commentary would not have been so gloomy,” said an analyst, requesting anonymity.

“At the end of the day, it depends on the money in the hand of the consumer,” said HUL’s management in a post-results press conference. “The evidence of two-wheelers slowing down clearly corroborates to the economy slowing down.”

Interestingly, HUL and other FMCG firms hope demand conditions would improve after the new government is elected. “There is a hope that the new government will give a fillip to the economy and how that plays out remains to be seen,” pointed out the analyst quoted above.

The probability of the hopes materializing is not without risks. Plus, investors should stay tuned to how the monsoon performs this year. For now, lack of disappointment in the March quarter results may well keep the stock in favour.

HUL shares have declined 3.3% since its December quarter results were announced. In comparison, the Nifty 50 index has gained 7.4% during the same time.

The company’s revenue in the March quarter rose by 9.3% year-on-year to ₹9,945 crore, largely in line with Street expectations. The home care, and foods and refreshment segments performed well, clocking 12.9% and 10.4% growth, respectively. Growth in the beauty and personal care segment was comparatively slower at 7.3%.

HUL saw 83 basis points improvement in its earnings before interest, taxes, depreciation and amortization (Ebitda) margin to 23.3%. A basis point is one-hundredth of a percentage point. The Ebitda margin expansion came despite an increase in overall raw material costs. The company kept a lid on its employee costs, and advertising and promotion expenses to compensate for higher input costs.

Still, HUL’s valuations are frothy, what with the shares having outperformed the Nifty 50 index in the past one year. Valuations at nearly 50 times estimated earnings for FY20 look rich, especially in light of the management commentary on the demand slowdown.