HUL: Gradually improving outlook to test investors’ patience

It should be noted that the commentary of HUL’s management while announcing the June quarter (Q1FY25) results on Tuesday after market hours, though not too exciting about business conditions, is largely positive. The management said it expects FMCG (fast-moving consumer goods) sector and rural demand to continue improving gradually. Further, the forecast of above-normal monsoon and better crop realization augur well, said the management.

The company’s underlying volume growth stood at 4% in Q1, much better than the 2% growth seen in each of the previous three quarters. However, pricing growth continued to be under pressure. Pricing declined by about 2% in Q1, marking the third straight quarter of drop in the measure. Accordingly, HUL’s operating revenue growth was just about 2% year-on-year with the personal care business revenue declining by 4.5%.

Also Read: Oberoi Realty stock hinges on how it reinvests cash flows

So, what fuelled volume growth? The fabric wash category within the home care business saw high-single digit volume growth. In the beauty and wellbeing business, hair care clocked double-digit volume growth led by Clinic Plus, Sunsilk and Dove.

A key highlight is that soaps saw low-single digit volume growth vis-à-vis a high-single digit decline in Q4FY24. Soaps fared better owing to pricing actions and a superior product formulation that helps lower the palm oil content without affecting the quality. Meanwhile, the foods and refreshment business experienced flat volume growth and was impacted by a harsh summer season, which weighed on the sales of nutrition drinks (Horlicks and Boost), although the ice cream category saw double-digit volume growth.

HUL said about 55% of its portfolio is gaining share now, and it expects this figure to go back to 60% by the end of 2024. Overall, the company has seen a gain of about 200 basis points (bps) in its market share since March 2021 levels. Further, the premium portfolio contribution is up about 300bps over the last three years.

Also Read: ITC shares hit a new high post budget. What is next?

Range-bound margins

In Q1, gross margin expanded by 155bps year-on-year as total raw material costs declined. However, higher advertising and promotion expenses curtailed operating profit margin (OPM) expansion to 26bps to 23.5%. “While there are margin improvement drivers like operating leverage, improving mix, premiumization, supply chain synergy, etc., higher brand investments will keep OPM range-bound in the near term but will drive modest margin expansion in the medium term," said a report by Nomura Global Markets Research.

Going ahead, HUL’s management expects pricing growth to be in low single-digit in the second half of FY25 (H2FY25). A favourable base should also help the company’s revenue growth in the second half of the year. “With a further improvement in volume growth and return of pricing contribution, we expect HUL’s revenue growth to largely converge with that of peers in H2FY25," said a report by BNP Paribas. The broking firm has lifted its FY26-27 estimated earnings per share by about 1% and also raised its target price-to-earnings multiple for the HUL stock.

Also Read: STT biggest negative for financial intermediaries, other BFSI cos in good stead

Based on Bloomberg’s consensus estimates, the HUL stock currently trades at almost 52 times estimated earnings for FY26. Sure, valuations aren’t exactly appealing but investors could argue many consumer stocks are pricey currently. Even so, the recent appreciation in the share price may keep further large upsides at bay in the near-term. A good monsoon season should bring comfort, and so should a continuous improvement in rural demand. On the other hand, a slower-than-expected pick-up in volume growth remains a key risk ahead.