HUL, ITC results decoded: Green shoots begin to show in consumer goods

The results of bellwethers HUL and ITC point to a recovery in the market. But the question is: Will it sustain?

The quarterly performance of a few key companies, whose numbers are just out, point to a resurgence in the domestic consumer goods market.

These include bellwethers such as Hindustan Unilever (HUL) and ITC (specifically its other FMCG business) as well as smaller firms such as Jyothy Laboratories (Jyothy Labs) and Bajaj Corp.

HUL reported a 11 per cent volume and revenue growth, respectively, for the December quarter, while ITC reported a nearly 12 per cent revenue growth in Q3 within its other FMCG business, which excludes cigarettes. On the bottom line front, while HUL saw a 28 per cent jump in third-quarter net profit, ITC’s earnings before interest and tax (EBIT) in its other FMCG business came in at Rs 470 million in Q3 versus a loss last year.

Jyothy Labs, meanwhile, reported 8.3 per cent revenue growth for the third quarter, which when adjusted for goods and services tax (GST), rose nearly 16 per cent with an underlying volume growth of 11.5 per cent. Jyothy Labs’s profit growth though was higher at 59.3 per cent in Q3. Bajaj Corp, which makes Bajaj Almond Hair Oil, also saw revenue growth of nearly six per cent for the third quarter, though net profit declined marginally for the period, sector analysts said.

Coming after disruptions such as demonetisation and even the GST, the recovery, though aided by a lower base (in the December 2016 quarter), does point to a few things these firms, especially, HUL and ITC, are doing right, experts said.

These include aggressive price cuts (aided by the GST), greater sales and promotions, and also a bigger direct distribution push into rural areas.

As Abneesh Roy, senior vice-president, institutional equities (research), Edelweiss, says, “The biggest lesson for these firms (after demonetisation and the GST) has been that they need greater control over distribution, especially in rural areas. The latter gives them (HUL and ITC) nearly 35-40 per cent of their overall sales. So the more they have control of distribution in these areas, the more they can maximise sales going forward.”

This point is endorsed by Ullas Kamath, joint managing director, Jyothy Labs, who said rural demand was looking better than before. 

“After three to four quarters, we are seeing an uptick in rural demand, reflected in a spike in sales of Ujala fabric whitener in Q3. This brand has a strong rural presence and in the December quarter, (year-on-year) sales growth of Ujala Supreme was nearly 10 per cent,” Kamath said.

Sumit Malhotra, managing director, Bajaj Corp, also believes that a revival in rural sales is likely in the future as the government looks to give income as well as consumption in the hinterlands a fillip. “I think companies are gearing up for it, improving their penetration and reach in rural areas,” he said.

HUL and ITC, for instance, in recent quarters have been working to improve direct distribution reach, which stands at 3 million and 2 million outlets currently.  The effort comes as the FMCG wholesale channel, whose contribution to industry sales is estimated to be 35-40 per cent, collapsed in the wake of the cash crunch as well as a shift to the GST regime in 2017.

HUL’s MD & CEO Sanjiv Mehta said he saw trade conditions normalising and a gradual improvement in consumer demand as the FMCG market recalibrated itself after demonetisation and the GST. “Between 2013 and 2016, underlying volume growth of the (FMCG) market was 3 per cent, which in the first nine months of 2017-18 has improved to 5 per cent. This will get better in time,” he said when announcing the company's results last week.

Sachin Bobade, a senior analyst at Mumbai-based Dolat Capital, said he saw both revenue and volume growth improving for FMCGs in the fourth quarter (of the current financial year) on the back of a lower base as well as better market conditions. But the big challenge, he said, remained firming crude oil prices, which could crimp margins.

“Crude oil prices have been steadily rising and this will compel companies to raise prices as packaging and freight costs increase. While companies may take a judicious approach to price hikes, it would be interesting to see how they manage this overall dynamic,” he said.