HUL does well on profit margins, but demand outlook remains dull

Consumer staples company Hindustan Unilever Ltd (HUL) was treading on a slippery slope in the June quarter. Underlying volume growth of 7% for the March quarter, a drop from the double-digit growth seen in the earlier five quarters, mirrored the consumption slowdown in the economy. Another quarter down the line, volume growth has further moderated to 5% for the June quarter, signalling that the slowdown is the new normal.

Plus, also do remember that volume growth in the base June 2018 quarter was high at 12%. As such then, June quarter volume growth is marginally lower than Street expectations and therefore, not shocking.

Here’s the interesting bit though. The company’s Ebitda (earnings before interest, tax, depreciation and amortization) performance was far better than expectations. Reported Ebitda margin increased as much as 250 basis points. A basis point is one-hundredth of a percentage point.

According to HUL, on a comparable basis, after adjusting for the accounting impact of Indian Accounting Standard 116 on leases, Ebitda margins have expanded by 150 basis points to 26%. A better product mix, flattish advertising and promotion expenses year-on-year, and a decline in other operating expenses helped Ebitda performance.

The outcome: HUL’s reported Ebitda of ₹2,647 crore came in ahead of Bloomberg’s consensus Ebitda of ₹2,474 crore. Overall, profit before tax and exceptional items, increased by 13.5% to ₹2,556 crore.

Within the beauty and personal care segment, performance of personal wash products was relatively muted during the June quarter. On the other hand, the home care, and foods and refreshment segments delivered a decent performance.

Going ahead, whether margins continue to improve or even sustain is the moot question. Investors will watch that closely in the coming days, considering the demand outlook remains little changed.

The company says near-term demand will remain subdued given the macroeconomic conditions. “In terms of market point of view, the rural market, which was growing ahead of urban, is growing at par with the urban market,” the management pointed out at the press conference. To be sure, the company had highlighted this during the March quarter results as well.

The HUL stock’s performance on the bourses does show that investors have taken the consumption blues into cognizance. So far this calendar year, the stock has declined by 7%. On the contrary, the Nifty 100 index has increased by nearly 3%.

Nonetheless, HUL’s valuations remain pricey. Currently, the stock trades at 51 times estimated earnings for FY20. Even so, from a near-term perspective, it is possible that margin performance may keep sentiments upbeat for the stock.

Plus, the company also seems to be benefiting from the so-called TINA (there is no alternative) factor, thanks to the lack of decent alternatives in the Indian market. As such then, sentiments for the HUL stock could well remain resilient.