Hindustan Unilever Limited (HUL)’s September quarter (Q2FY23) was challenging. Margin pressure remained intense, with gross profit margin down 580 basis points (bps) from a year ago to 45.8%. One basis point is 0.01%. Analysts at HDFC Securities Ltd said such margin fall was “unseen for the past several years”. Gross margin is at 43-quarter low, he said.
HUL expects a gradual improvement in gross margin in the December quarter. However, investors would do well to keep expectations low as there may not be a meaningful correction in haste. The company said its net material inflation (NMI) in the December quarter will be slightly lower than the previous three months, though significantly higher than a year ago. Indeed, palm oil prices have fallen by almost 50% since their March peak. However, palm oil is the only major input in HUL’s raw material basket, which saw prices fall by 20% in Q2. Prices of other commodities like crude oil, soda ash and skimmed milk powder were 30-55% higher than a year ago. The problem is compounded by the strength of the dollar.
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The fall in palm oil prices has helped the company reduce prices in its skin cleanser portfolio. The move will boost volumes, but improving demand is paramount. There is silence in the rural markets. As such, HUL is cautiously optimistic about the demand environment and is sure that the overall growth in the short term will be value-driven.
This has been the trend so far in the broader Fast Moving Consumer Goods (FMCG) market. Nielsen data shows that the FMCG market in terms of value has grown 5% over the past three months on a three-year compound annual growth rate (CAGR). Volumes, on the other hand, declined 1%. HUL’s volumes grew 4% in the September quarter over a year ago. The three year volume CAGR is 3%.
“We do not expect quick volume and margin recovery in H2FY23. With massive demand disruption and structural pressure from new-age brands in the premium space, we see limited surprising opportunities for HUL, analysts at HDFC Securities said in a report on October 22.
HUL’s price-cost gap was wide in the previous quarter. Its NMI, which rose 22% a year ago, was partially offset by a 12% underlying price increase. HUL’s NMI grew by 20% in the June quarter, while the price growth stood at 12%.
Gross margin declined sharply in the September quarter, but there was some reduction in earnings before interest, tax, depreciation and amortization (Ebitda) levels due to lower advertising and promotional (A&P) expenses. Ebitda margin for the September quarter declined by 172 bps to 22.9% from a year ago. However, this lever may not be available here, as HUL plans to increase its A&P spend.
The bright spot is that in the six months to September 30, over 75% of HUL’s businesses won market share.
Analysts at ICICI Securities said premium discretionary within Staples is largely discretionary and HUL is somewhat better off with the first category.
The home care division saw the strongest revenue growth of 34% compared to a year ago, driven by high double-digit growth in fabric wash and home care.
The food and refreshment category saw the weakest revenue growth of 4%, mainly due to a fall in prices across the tea portfolio. Beauty and personal care revenue increased 11%.
HUL shares hover near their 52-week high 2,734 each. Valuations are not cheap, thereby limiting major upside in the near future. According to data from Bloomberg, the stock is trading at 53 times FY24 earnings.
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