HUL sails through a choppy quarter; sees a tough road ahead

One glimmer of hope ahead would be if rural fortunes improve, helped by good monsoons
One glimmer of hope ahead would be if rural fortunes improve, helped by good monsoons

Summary

  • HUL’s gross margin fell by 300bps in Q4. But Ebitda margin fell only by 27bps as ad spends declined
  • Sequentially, inflation woes will persist, which means near-term margin outlook isn’t bright

MUMBAI/BENGALURU : Hindustan Unilever Ltd (HUL) faced two big challenges in the fourth quarter of the financial year 2022 (Q4FY22). One, cost pressures intensified further. Two, demand outlook was gloomy. This toned down expectations from the fast-moving consumer goods company’s Q4 results.

Against this backdrop, these worries did not end up having a severe impact on the financials, with HUL performing well on some counts. Elevated costs dragged gross margins down by 300 basis points (bps) year-on-year (y-o-y) to 49.5%, the lowest in the past many quarters. One basis point is 0.01%. However, an 8.7% drop in advertising and promotion expenses amply cushioned the drop at the Ebitda (earnings before interest, taxes, depreciation and amortization) level. For perspective, HUL’s Ebitda margin contraction was curbed to just 27 bps to 24.1%. This compares with a 99 bps expansion in Ebitda margin in Q3 to 25%.

Fighting the odds
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Fighting the odds

Note that HUL clocked flat volume growth last quarter. This is the fourth continuous quarter of deterioration in volume performance, but analysts were expecting a 2-3% fall in the measure.

However, investors can hardly rejoice given that commodity inflation is a significant headwind for the industry. “The operating environment remains challenging. We are likely to see sequential decline in margins and (cost) savings will be harder. So, margins will remain under pressure in the near-term but we expect them to improve gradually," said Sanjiv Mehta, chief executive officer and managing director, HUL, at the post results conference. Q4 investor presentation tells us the company expects more inflation sequentially in the June and September quarters.

“While the company has taken price hikes, more maybe required given the sharp inflation in commodity prices. In Q4, they have protected Ebitda margin by steeply cutting ad spends, which is not good strategy beyond some quarters," said Himanshu Nayyar, lead analyst, institutional equities, Yes Securities.

Moreover, it is worth noting that even as volumes were better than expectations, this also means revenue growth last quarter was price/mix led. HUL’s operating revenues rose 11% y-o-y in Q4 to 13,462 crore. The company’s home care segment performed well with revenues increasing by 24% y-o-y to 4,750 crore. Here, fabric wash and household care grew in strong double-digits, said HUL.

On a high base, revenue growth in the beauty & personal care segment was comparatively muted at 3.6% to Rs4712 crore. Here, skin cleansing saw double-digit growth led by pricing. But colour cosmetics saw a soft quarter impacted by Omicron wave and market slowdown in discretionary categories. Performance of the foods and refreshment segment was muted as well with revenue growth at 5.3% to 3,698 crore. The company said the tea portfolio continued strong performance and coffee delivered double-digit growth.

The path ahead is not rosy, with costs being high. Investors have taken note. In the past one year, the stock has declined by 10% vis-à-vis the 11% gain in the Nifty FMCG index. Indeed, HUL stock’s valuations have moderated. Even so, the shares are not particularly cheap, trading at nearly 50 times estimated earnings for financial year 2023, according to Bloomberg data.

“Given the margin headwinds, we expect HUL’s consensus earnings estimates for FY23 to see a further downward revision. While valuations are now at reasonable levels, we do not expect a steep upside in the stock from the current levels unless inflation cools down meaningfully," said Nayyar. That said, one silver lining amid these dark clouds would be improvement in fortunes of the rural economy on the back of a good harvest and timely monsoon.

 

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