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Hindustan Unilever Ltd’s (HUL’s) June-quarter results (Q1FY22) were discouraging for investors, which is obvious from the more than 2% drop in its shares post-results. HUL shares are less than 4% higher compared to pre-covid highs, and lags behind the Nifty FMCG index, which is 15% higher.

As it turns out, volumes of India’s largest fast-moving consumer goods (FMCG) firm were back at pre-covid levels. Analysts now typically look at the two-year average annual growth number to negate the impact of last year’s low base. By this measure, HUL’s volumes were flat, as like-for-like growth stood at 9% in Q1FY22 and -8% in the year-ago period.

In Q4FY21, the two-year average annual growth number stood at around 5%. Clearly, the impact of the second wave brought the recovery to a halt in Q1. However, analysts said the sequential recovery seen in June suggests the recovery is gathering pace again.

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Satish Kumar/Mint


HUL saw good demand momentum in March, which was sustained in April. Renewed restrictions due to the second wave, however, impacted offtake between late April and May. With cases declining, June has seen a good sequential recovery, albeit it still remains below pre-covid levels," analysts at Jefferies India Pvt. Ltd said in a note last month.

But while the impact on volumes was more or less expected, investors also had to deal with weaker-than-expected pricing. “Trade promotions were normalized during the quarter from a low base last year, which impacted pricing growth. This meant the pricing growth came in below expectations at 3%," said Himanshu Nayyar, lead analyst, institutional equities, YES Securities.

Besides, the GSK-led nutrition segment delivered a below-than-expected performance, as the pandemic has delayed HUL’s plans of developing this portfolio, Nayyar added.

Among the segments, the home care business has performed well, posting revenue growth of 12% year-on-year (y-o-y), helped by double-digit growth in fabric wash. HUL has taken calibrated price hikes across fabric wash and the household care portfolio to partly offset input cost pressures. The beauty and personal care business grew 13%, but this was on a relatively favourable base. Food and refreshment segment revenues rose 12%.

To be sure, on the profitability front as well, the show isn’t all that striking. Earnings before interest, tax, depreciation and amortization (Ebitda) grew 7.7% y-o-y to 2,847 crore, lower than some analysts’ expectations. Higher advertising and promotion expenses weighed on operating margins. Moreover, gross margin also contracted by around 140 basis points to 50.4%. One basis point is 0.01%. However, given the sharp rise in key raw material costs, such as palm oil and tea prices, gross margin pressure was somewhat expected.

Currently, the HUL stock trades at almost 51 times estimated earnings for FY23, based on Bloomberg data. Going ahead, inflationary pressures in input costs are a worry. The firm said the rural market continues to be resilient, which is encouraging. That said, investors will closely watch sales recovery, but the outlook isn’t too bright. “With the normalization of consumer demand after the covid recovery, we believe Q2FY22 should witness strong sales recovery. However, it would be difficult to significantly grow revenues on a high base of H2FY21," said ICICI Direct Research in a note to clients.

“From a valuation perspective, mid-cap FMCG stocks are likely to outperform the HUL stock given better growth prospects and relatively cheaper valuations," said Nayyar.

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