Hindustan Unilever: Q1 improves earnings outlook despite uncertainty

Synergy benefits from GSK Consumer merger, VWash buy give leg up to firm's portfolio

Hindustan Unilever’s (HUL’s) numbers in the first quarter of the financial year 2020-21 (Q1FY21), reported after market hours on Tuesday, beat Street estimates on the volume and operating profit fronts, and also indicated potential for earnings upgrades. This should lift sentiment for the stock, which is up 26 per cent from its March lows.

Strong support from its resilient portfolio and improved cost efficiency, along with synergy benefits from the merger of GSK Consumer, bode well for HUL.

Although the Q1 numbers are not strictly comparable because GSK Consumer’s merger came into effect from April 1, HUL’s top line grew by 4.2 per cent year-on-year (YoY) to Rs 10,406 crore, beating expectations of Rs 9,880 crore. The growth was driven by health, hygiene and nutrition products, which accounted for 80 per cent of overall business and grew by 6 per cent in volume terms.

However, a sharp drop in other discretionary and out-of-home consumption products (20 per cent of revenues), which also impacted overall product mix, led to an 8 per cent fall in the underlying volumes. Yet, overall volume performance was better than analysts’ expectations of an 11-13 per cent volume decline. HUL said, its underlying volume growth reflects the impact of product mix and actual volume growth.

 

 

Kausthubh Pawaskar, analyst at Sharekhan, says, “Besides better-than-expected performance in Q1, HUL’s resilient portfolio, which has large revenue share, would continue to see good growth going ahead supported by distribution synergies from GSK Consumer merger.” We believe there would be upward revision in HUL’s earnings estimates,” he added.

The GSK Consumer merger and VWash acquisition have strengthened HUL’s portfolio. The company is also enhancing them with new launches — Horlicks with added Zinc is an example.

Better revenue performance coupled with cost synergies from GSK Consumer merger and lower advertising spends (393 basis point down as a percentage of operating income) supported HUL’s operating performance. Ebitda (earnings before interest, taxes, depreciation, and amortisation) of Rs 2,644 crore, which was flat YoY, was ahead of the Rs 2,577 crore estimated by analysts. Its pre-tax profit before exceptional items declined by 1.1 per cent YoY to Rs 2,529 crore, slightly lower than the estimate of Rs 2,574 crore. HUL reported an exceptional cost of Rs 118 crore related to merger and business integration in Q1.

While Q1 beat estimates and there is scope of earnings upgrade, the road ahead will still be bumpy. The unprecedented situation and localised lockdowns in many parts of the country could have some impact, which the management also alluded to. Thus, how the company manages its overall supply and distribution chain will be crucial.