Hindustan Unilever Limited (HUL) shares have gained about 22 per cent in the last one month. It is true that moderation in palm oil prices, a key input for many fast-moving consumer goods companies, has helped the sentiment. However, it is not as if HUL will get the benefit of this fall immediately.
One is that prices of most commodities remain high. The company said the average prices of key commodities for HUL in the June quarter (Q1FY23) remained above the 10-year average. It further added that, consumption of higher cost pipeline inventory would mean that Q2FY23 would take a sharper hit on margins as compared to Q1. As such, the Company expects net content inflation to increase sequentially in Q2FY23. There is also a headwind to margin from depreciation in the Indian rupee.
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There has been a massive price hike in several categories in the past few months, but this is not enough to offset the increase in input cost. In Q1FY23 and Q4FY22, HUL’s gross profit margin had declined by 309 basis points (bps) and 301 bps, respectively, on a year-on-year (YoY) basis. For the same time frame, the decline in Ebitda (earnings before interest, taxes, depreciation and amortization) margins was 114 bps and 27 bps, respectively.
HUL was able to better protect its EBITDA margin in Q4 as it cut advertising and promotional expenses by 8.7% annually. These expenses have grown by about 30% annually in Q1FY23. This, coupled with higher input costs, weighed on the company’s EBITDA margin in the previous quarter. Nevertheless, HUL did quite well on the Ebitda margin front in Q1, given that the decline in gross margin was very sharp.
The company indicates that marketing spend is likely to remain high. Speaking to reporters, HUL CEO and Managing Director Sanjiv Mehta said, “We will not blink an eye when it comes to spending behind our brands.
There were some really bright spots in Q1. Volume performance, for example, was ahead of Street expectations by about 4%. HUL achieved 6% volume growth in Q1, driven by all segments and a lower base. Growth was 9% in Q1FY22, but remember that volume declined by 8% in Q1FY21.
In Q1FY23, HUL’s pricing growth was 12%, driving the company’s overall operating revenue growth to approximately 20% year-over-year. 14,272 crores. The home care segment was the best performer among HUL’s three core businesses, posting 30% revenue growth driven by strong performance in the fabric wash and home care segments. “The price hikes in the fabric wash and home care portfolio were made as input costs continue to rise at a very high level,” the company said. The beauty and personal care segment witnessed a growth of 17%, while the food and refreshment segment witnessed a growth of 9.3%. ,
However, the demand situation is still poor. The rural market remains muted and a good monsoon season will be crucial for the company.
Against this backdrop, HUL expects growth in the near future to be value driven. A sharp fall in commodity prices will help. The price of Malaysian palm oil is down nearly 50% from the highs seen in early March. If this sustains (or declines further) and other key commodities show similar trends on a consistent basis, the company expects a gradual improvement in margins from Q3 FY22 onwards. Meanwhile, HUL shares are now trading at 53 times estimated earnings for FY24 based on Bloomberg data. Valuations aren’t exactly cheap after the recent rally in the share price. Analysts expect some improvement in earnings after Q1 results.
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