The volume question facing HUL

 HUL’s shares have risen by 5.5% in 2023 so far, versus the 23% gain seen in the Nifty FMCG index.  (REUTERS)
HUL’s shares have risen by 5.5% in 2023 so far, versus the 23% gain seen in the Nifty FMCG index. (REUTERS)

Summary

The good news is that HUL has fared better than some analysts’ expectations. The fast-moving consumer goods (FMCG) company’s Q1 gross margin marks the third consecutive quarter of improvement.

Hindustan Unilever Ltd’s (HUL) gross margin for the three months ended June (Q1FY24) was expected to improve amid softening commodity costs. The good news is that HUL has fared better than some analysts’ expectations. The fast-moving consumer goods (FMCG) company’s Q1 gross margin marks the third consecutive quarter of improvement. The metric expanded by 256 basis points (bps) to 49.9% in Q1. For perspective, analysts from Kotak Institutional Equities, and Nomura Financial Advisory and Securities (India) expected the measure to increase by 189 bps and 113 bps, respectively. The company stepped up advertising and promotion (A&P) expenses to aid in driving demand. This has meant Ebitda margin expansion was curtailed in Q1.

And this is where the margin-led good news ends. A&P spends are expected to rise further. On the revenue and volume front, HUL has begun the new financial year on a rather gloomy note. Total operating revenue growth in Q1 at 6.1% year-on-year was the slowest seen in the past many quarters. Underlying volume growth came in at 3%, missing analysts’ expectations. This is also the lowest volume growth print seen in the past five quarters. HUL’s foods and refreshment business put up a weak show with volume growth being ‘near flat.’ Within this segment, the volume of coffee, ice cream and health food drinks saw a decline. The unseasonal rains impacted consumption of ice cream. Further, higher inflation in premium teas meant tea saw modest volume led growth with consumers downgrading.

Graphic: Mint
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Graphic: Mint

The home care segment did relatively better, clocking 10% revenue growth. Here, the fabric wash portfolio saw double-digit growth which was balanced between price and volume. Premium portfolio outperformed and market share gains continued. Growth was slower in beauty and personal care (BPC), and foods & refreshment at about 4% and 5%, respectively. Within BPC, HUL took price reductions in the soaps portfolio. Moving ahead, the path is challenging. Competitive intensity is expected to rise ahead. The company maintains that the operating environment remains volatile. It expects weather-related risks to persist. Of course, here, the impact on inflation and rural demand needs tracking. Note that the industry volume growth in the rural markets has finally entered the positive territory in Q1 on a favourable base. On a two-year compound annual growth rate basis, industry volume growth was flat in Q1 with rural declining by 4%. Overall, HUL expects only a gradual recovery in volume on the back of a high level of cumulative inflation. Further, it also anticipates price growth to be flat or negative, provided commodity prices remain stable. This means volume performance would play a crucial role in supporting revenue growth ahead.

“If you look back at our track record, we have grown two-thirds by volume and one-thirds by price," said the company in an interaction with the media. It expects that sort of ratio to return.

In Q1, HUL’s pricing growth stood at about 3%. “From the September quarter onwards, HUL’s pricing growth is likely to be subdued amid easing inflation. This means revenue growth would be driven by volume performance. In this backdrop, investors will watch whether the company is able to deliver good revenue growth," said Sachin Bobade, analyst at Dolat Capital Market. Meanwhile, HUL’s shares have risen by 5.5% in 2023 so far, versus the 23% gain seen in the Nifty FMCG index. But valuations are steep with the stock trading at 49 times FY25 earnings estimates, according to Bloomberg data. Now, it boils down to whether volume performance can surprise positively.

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