HUL investors must keep expectations low

While lower ad spending aided Q2 Ebitda margin, it may not be available hereon  (Photo: Reuters)
While lower ad spending aided Q2 Ebitda margin, it may not be available hereon (Photo: Reuters)


  • Apart from palm oil, prices of HUL’s other key inputs were elevated in the September quarter
  • HUL expects net material inflation in Q3 to be a bit less than Q2 but sharply higher y-o-y

Hindustan Unilever Ltd’s (HUL) September quarter (Q2FY23) was challenging. Margin pressures remained acute, with gross profit margin contracting by 580 basis points (bps) from a year earlier to 45.8%. One basis point is 0.01%. This kind of margin dip was “unseen for the last many years", said analysts from HDFC Securities Ltd. Gross margin is at a 43-quarter low, they said.

HUL expects a sequential improvement in gross margins in the December quarter. However, investors will do well to keep expectations low as a meaningful improvement may not happen in a hurry. The company said its net material inflation (NMI) would be a bit lower in the December quarter from the preceding three months, though significantly higher from a year earlier. Indeed, palm oil prices have dropped by about 50% from the peak in March.However, palm oil is the only key input in HUL’s raw material basket, which saw a 20% y-o-y drop in prices in Q2. Prices of other commodities, such as crude oil, soda ash, and skimmed milk powder, were higher by 30-55% from a year earlier. A strengthening dollar is adding to the woes.

Uncomfortably high
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Uncomfortably high

The fall in palm oil prices has helped the company reduce prices in its skin cleansing portfolio. This move will boost volumes, but an improvement in demand is paramount. Rural markets remain muted. As such, HUL is cautiously optimistic about the demand environment and maintains that overall growth will be price-led in the near term.

This has been the trend in the broader fast-moving consumer goods (FMCG) market so far. The FMCG market has grown by 5% on a three-year compound annual growth rate (CAGR) basis in value terms, in the last three months, showed Nielsen data. On the other hand, volumes declined by 1%. HUL’s volumes grew 4% in the September quarter from a year earlier. The three-year volume CAGR is 3%.

“We do not expect a quick volume and margin recovery in H2FY23. With ongoing demand disruptions in mass segments and structural pressures from new-age brands in the premium space, we see limited surprise opportunities for HUL," said HDFC Securities’ analysts in a report on 22 October.

HUL’s price-cost gap was wide in the last quarter. Its NMI, which grew 22% from a year earlier, was partially offset by the 12% underlying price growth. In the June quarter, HUL’s NMI rose 20%, while price growth stood at 12%.

Gross margins fell sharply in the September quarter, but there was some cushion at the earnings before interest, tax, depreciation and amortization (Ebitda) level because of lower advertisement and promotion (A&P) expenses. September quarter Ebitda margin narrowed by 172bps from a year earlier to 22.9%. However, this lever may not be available hereon, as HUL plans to raise its A&P spending.

The bright spot is that in the six months to 30 September, more than 75% of HUL’s businesses won market share.

Analysts at ICICI Securities said premium discretionary within staples is outperforming mass discretionary and HUL is somewhat better placed with the first category.

The home care division saw the strongest revenue growth at 34% from a year earlier, led by high double-digit growth in fabric wash and household care.

The foods and refreshment category saw the weakest revenue growth at 4%, primarily because of the price drop in the tea portfolio. Beauty and personal care revenues grew by 11%.

Shares of HUL are hovering near their 52-week highs of 2,734 apiece. Valuations are not cheap, limiting large near-term upsides. The stock trades at 53 times its FY24 earnings, according to Bloomberg data.

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