HUL bets on pick-up in rural demand

Growth in the quarter was led by uptick in volumes after disruption caused due to GST

Hindustan Unilever’s (HUL)’s September quarter numbers were better-than-expected. Adjusted for the goods and services tax (GST) accounting, revenues on a comparable basis were up 10 per cent year-on-year (y-o-y) at Rs 8,309 crore in the quarter. It was led by domestic volume growth of four per cent, against analysts’ estimates of three per cent. Price hikes undertaken in the previous quarters accounted for the rest. 

Growth recovered in latter half of the quarter on restocking following the disruption caused due to the implementation of the GST. Among businesses, the home care segment drove the overall revenue growth, up 13 per cent y-o-y. With the launch of Lever Ayush, HUL is hoping for a bump up in growth in the personal care segment, which was up eight per cent. An 11 per cent growth in the foods segment was led by the Kissan product line.

Though the volume growth had gone up, it has come on the back of a low base both on a sequential basis (flat growth in June quarter) and one per cent fall in the year-ago quarter. This is impressive considering the GST-led disruption. 

The management has indicated that a pick-up in volume growth will be gradual, led by an improving rural economy. Demand is expected to grow on the back of a good monsoon, strong minimum support prices announced on Tuesday and investments in the rural sector. 

Kaustubh Pawaskar, senior research analyst at Sharekhan, expects the volume growth to come through on rural demand. 

Some of this (volume-led operating leverage) and benefits from the ongoing savings programme is expected to get reflected in the operating performance as was the case in the September quarter. Despite higher advertising and promotion of the brand Lever Ayush, operating profit margins were up 180 basis points (bps) to 20.2 per cent, on a comparable basis. 

The company indicated that the quantum of advertising costs, which went up 20 per cent y-o-y and 200 bps as a percentage of sales in Q2 would depend on the product promotion requirements going ahead. While input costs were stable in the quarter, they could inch up and weigh on margins. Given the improvement in operating performance in the reporting quarter, net profit before exceptional items was up 14 per cent y-o-y to Rs 1,236 crore.

The Street will keenly watch out for a further improvement in volumes and the impact on the margins, given the pressure on input costs.