One factor that stands out in Hindustan Unilever Ltd’s (HUL) September quarter results (Q2FY24) is the eye-popping gross margin expansion. Gross margin rose as much as 692 basis points (bps) year-on-year to 52.7%. Sure, gross margin was expected to rise amid easing inflationary pressures, but the quantum is higher than foreseen.
It is worth noting here that HUL’s September quarter revenue and net profit (before exceptional items) benefitted to some extent by a one-off credit from favourable resolution of past indirect tax litigation. Excluding this one-off, revenue and net profit growth would have been 3% and 7%, respectively. In any case, HUL’s reported operating revenue growth of 3.6% is nothing to write home about. It is the slowest growth in the past many quarters. Volume growth fell to a low of 2%, marking the third straight drop in the measure. “Pricing growth has further reduced to 1.6% versus 3% in the June quarter,” said analysts from Prabhudas Lilladher in a first-cut note. In the near term, HUL expects pricing to be marginally negative if commodity prices remain where they are. This also means volume growth needs to revive meaningfully to boost the overall revenue growth. One issue here is that rural demand recovery has been lacklustre even as urban markets are faring comparatively better. As per the September Nielsen FMCG Market Report, the industry’s urban volume growth was 3% on a two-year compound annual growth rate (CAGR) basis. The measure for the rural market stands at -1% . Nonetheless, this is a sequential improvement as the rural market two-year CAGR was -4%, according to HUL’s June quarter presentation.
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Coming to HUL’s segmental performance in Q2, the foods and refreshment division disappointed the most with a mid-single digit volume drop. Nestle India’s performance was better with low-to-mid-single digit volume growth estimated by Prabhudas Lilladher. In Q2, for HUL, tea saw modest growth as the category continued to witness consumers downgrading, while growth in coffee was driven by pricing. The company’s other two divisions—home care and beauty & personal care (BPC)—saw mid-single digit volume growth. In the case of home care, price cuts taken in both fabric wash and household care portfolio have led to a revenue growth of 3.3%. The premium portfolio outperformed in fabric wash. In BPC’s skin cleansing portfolio, price cuts offset the low-single digit volume growth. Further, skin care and colour cosmetics saw double-digit growth led by outperformance in Ponds and Vaseline.
Overall, more than 75% of HUL’s business is winning volume share. However, the company said in a media call that it is losing market share in the mass-end segments. To be sure, competitive intensity is high with small players resurgent in select categories and eating into bigger companies’ pie. For example, the market value growth of tea for small players was 1.4 times that of large ones in the three months ended August.
HUL expects advertising and promotion (A&P) spends to remain firm amid high competition. Higher A&P expenditure has curbed Ebitda margin expansion to 129 bps in Q2. Hereon, investors will closely watch how volumes pan out as pricing growth is not expected to be material. In Q3, demand would get a boost from the festive season.
HUL’s shares are flat so far in 2023 and trade at nearly 48 times FY25 estimated earnings, showed Bloomberg data. A surprise on the volume front may bring cheer to investors, but that appears tough, especially when the rural demand outlook is subdued. Moreover, crude oil prices are elevated and if they persist, then margin may take a hit.
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Updated: 20 Oct 2023, 12:02 AM IST