HUL: Higher costs, volume and market share focus could hit profitability

The near term could see some pressures on the gross margin which was down 150 basis points y-o-y in the quarter

Hindustan Unilever’s Septe­mber quarter results were broadly in line with Street expectations of sequential recovery and volume/value growth in the 1-3 per cent range. What stood out was the 19 per cent uptick in the food and refreshment category, adjusted for the GSK Consumer Healthcare acquisition. While the other two categories of homecare and beauty and personal care posted a sequential recovery, they are yet to return to growth compared with the year-ago quarter. 

Double-digit growth rates for the food business, led by higher in-home consumption of Knorr and Kisan portfolio and calibrated price hikes in the tea segment, spurred sales growth. While this trend is ex­pected to continue, what cou­ld be a drag for the category is the ice-cream portfolio due to weak demand for out-of-home products. While the company remains bullish about the prospects of the nutrition portfolio (including acquired brands), supply chain disruption led to a muted performance in the quarter. 

Skin care, colour cosmetics, and deodorants were impacted as people stayed indoors and cut discretionary spending. While the discretionary segment has recovered from 45 per cent fall in the June quarter to 25 per cent fall in the September quarter, the company expects further improvement as unlock continues and people venture out. Despite price cuts on the back of falling raw material costs, the fabric wash segment also disappointed. 

The near term could see some pressure on gross margins, which were down 150 basis points year-on-year in the quarter. For products such as tea, where raw material prices have risen sharply, the company highlighted the need to improve market share and volumes from the unorganised segment even if it means giving up gross margins in the near term. Analysts expect gross margins to reduce a bit in the ongoing quarter, though the dip would be lower than in Q2. While operating profit margins were higher in the quarter due to lower ad spends than a year ago, this could reverse as promotions pick up in Q3.

Margins in the medium term, however, are expected to pick up as sales growth recovers for the more profitable beauty and personal care segment, price hikes are undertaken and operating leverage kicks in.  

Though the stock’s reaction to the results was weak, analysts believe growth trajectory continues to improve across categories and the company’s focus on volumes should aid in gaining market share in the near term.