Volume growth to bounce back soon: HUL

Hindustan Unilever (HUL) reported a flat volume growth for the June quarter as trade destocking impacted sales in the run-up to the goods and services tax (GST). In an investor call on Tuesday, HUL’s management including MD & CEO Sanjiv Mehta and CFO P B Balaji responded to questions regarding the company’s way forward. Edited Excerpts:

HUL’s sales growth in the June quarter was completely driven by price. What is the strategy on price-led growth in the future? Do you see price hikes happening at all?

There will be little room for price hikes as we propose to pass on the net GST benefit to consumers. The net benefit is calculated after taking the output tax changes into account on our existing categories. 

On soaps, toothpaste, hair oils and detergent bars, there is a positive impact (because GST rates are lower), while on detergent powders, hair care (excluding hair oil), skin creams and colour cosmetics and instant coffee, the impact is negative (because GST rates are higher). The net benefit of these changes has been positive for the company, hence price cuts, which have been passed to consumers from day one of GST (July 1). Further changes (in price) are underway.

What is the thinking on volume growth? By when do you see it bouncing back? 

Volume growth should be back in the later part of the financial year (FY18). We’ve had a track record of 4-6 per cent in terms of volume growth (in the past), which we should get on to in the forthcoming quarters. 

We also remain optimistic about rural demand picking up because of an improvement in the water table due to good monsoon this year and last year. Agri realisations, which were impacted due to demonetization, should also pick up and government schemes should aid rural growth. All of this should combine to help improve volume growth going forward.

Does wholesale continue to be a challenge or do you see things improving?

Wholesale continue to be a worry. However, organised wholesale (cash and carry stores of Metro and Walmart, for instance) will gain at the cost of unorganised wholesale in the GST regime. They will get bigger. GST will also push companies to drive their direct distribution efforts even more as they look to bring down their dependence on wholesale (unorganised wholesale). We will look at sustainable direct reach because we see clear benefits coming out of this.

What about input costs? HUL gained on the margin front from benign raw material prices in the June quarter. Your comments.

Yes, input costs have been stable in the June quarter. How it will pan out in the forthcoming quarters is difficult to tell at this stage. But besides (benign) raw material prices that aided gross margins, there was a rigorous cost savings programme that we initiated (such as zero-based budgeting) that helped the operating margins. Our savings agenda will continue and margins should hold if volume growth is promising.

The Axe brand has been extended into male grooming. Tell us more about it.

Axe Signature, which was so far present as a brand in deodorants, has been extended into men’s grooming. The range includes shaving gels, creams and after-shave lotions. More products will be added to this list in the future.