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Home >Markets >Mark To Market >HUL’s margin beat leaves investors unimpressed; covid-19 risks remain

It was a foregone conclusion that Hindustan Unilever Ltd’s (HUL) reported growth would be robust for the March quarter (Q4FY21). The quarter had the benefit of a favourable base. Recall that underlying volumes had declined by 7% in Q4FY20 owing to the impact of a demand slowdown and the covid-19 lockdown last year.

As such, the fast-moving consumer goods (FMCG) company has broadly done better than analysts’ expectations this time around. In Q4FY21, volumes increased by 16% and domestic consumer growth (like-for-like revenue performance) stood at 21%.

For perspective: JM Financial Institutional Securities Ltd was expecting these parameters at 15% and 20%, respectively. Now, given the base effect, looking at the two-year compounded annual growth rate (CAGR) trends may be helpful. Analysts from Jefferies India Pvt. Ltd said the two-year CAGR for like-for-like revenue stands at 5%.

Good optics
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Good optics

Perhaps, this should bring a reality check to investors. An analyst, seeking anonymity, said: “While HUL’s March quarter results are good, they are not significantly better than expectations."

HUL shares ended flat on Thursday on the National Stock Exchange.

Nonetheless, the company did well on the earnings before interest, tax, depreciation and amortization (Ebitda) margin front, recording a 146 basis points expansion on a year-on-year basis to 24.4%. One basis point is one-hundredth of a percentage point.

This comes at a time when gross profit margin has contracted by around 120 basis points to 52.6%, owing to elevated inflationary pressures. Commodity inflation in crude-based and palm oil inputs have weighed on gross margins, said analysts. Note that this is the fourth consecutive quarter of decline in gross margins. Nonetheless, savings in advertising and promotional expenses and other expenses boosted March quarter Ebitda margins, which was better than many analysts’ expectations.

Overall, HUL’s operating revenues, which reflect the impact of merger of GSK CH, have increased by 34.6% year-on-year to 12,132 crore. Growth in the beauty and personal care; and foods and refreshment businesses was robust. Revenue from the beauty and personal care business, which accounted for 37.5% of HUL’s revenues, increased by nearly 20% compared to the year-ago period. Here, skin cleansing, hair care and oral care categories delivered high double-digit growth.

Furthermore, the company derived around 29% of its revenues from the foods and refreshment business. This segment grew by 36%, excluding the impact of the GSK CH merger and acquisition of VWash. HUL saw high double-digit growth in tea brands. Ketchups, soups and ice creams also performed well. The home care business accounted for most of HUL’s remaining revenues and increased by 14.6% year-on-year. The segment benefited from a strong sequential revival in fabric wash, aided by better mobility.

Meanwhile, as mentioned earlier, HUL shares were unmoved by its March quarter results, although some analysts said its performance would support the stock in the near term. HUL said in view of the second covid wave that demand outlook is difficult to predict from a near-term perspective. Plus, inflationary pressures continue and that poses a risk to margins.

The company is taking judicious pricing actions coupled with cost agility and savings programmes, and so margin trajectory needs to be watched. The stock trades at almost 59 times estimated earnings for 2021-22, based on Bloomberg data. As such, valuations are not particularly cheap.

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