In the gloomy world of consumption, Hindustan Unilever Ltd’s (HUL’s) December quarter earnings seem like a ray of sunshine. The fast-moving consumer goods (FMCG) behemoth clocked an underlying volume growth of 5% for the third quarter, better than many analysts’ estimates. This is steady compared to the first half volume growth performance of this financial year.
Note that apart from Dabur India Ltd, which clocked a volume growth of 5.6% for the December quarter, other FMCG companies have disappointed on this count. True, Godrej Consumer Products Ltd saw a higher 7% volume growth but that has come off a relatively low base. Shares of Marico Ltd have fallen nearly 10% on NSE in the last two trading days, after the company reported a 1% decline in India volume.
Against this backdrop, analysts seem pleased with HUL’s results despite the fact that revenues at ₹9,808 crore lagged Street estimates marginally. Operating revenue increased by 2.6% year-on-year.
But profitability is healthy, point out analysts. Earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded by a robust 352 basis points to 24.9% thanks to the company’s savings agenda and a tight lid on other expenses, which declined by 8%. One basis point is one hundredth of a percentage point. However, investors will watch whether the good run on the margins sustains.
“Increased innovation and new product launches amid weak macros, although good for medium-term, mean margin expansion is likely to decelerate in 1HCY20," wrote ICICI Securities Ltd analysts in a report on 31 January.
Within HUL’s business segments, the beauty and personal care division’s revenue declined by 2.8%, impacted by a worse than expected slowdown. The personal wash category was affected by negative market growth and the skin care category was adversely impacted by delayed winter. The home care business was the star performer among HUL’s segments, registering almost 10% revenue growth. Food and refreshment saw a revenue growth of 8%.
Overall, HUL’s earnings before tax and one-time items increased by almost 16% to ₹2,328 crore. Valuations of the stock at 51.6 times estimated earnings for financial year 2021, based on Bloomberg data capture a good share of the optimism. Moreover, the outlook is not that rosy.
“In the short term, demand outlook and market growth continue to be challenging," says the company. Rural markets are yet to recover, with demand growth now at 0.5 time that of urban centres. A few quarters ago, rural growth was faster. The Union budget fell short of expectations as far as giving a boost to consumption demand goes.
That said, HUL’s third quarter earnings may well offer support to its stock valuations, especially given that other FMCG companies are struggling to deliver.