HUL Q3: Revenue may rise up to 12% YoY; margins to contract, analysts say

Analysts expect nearly 200 basis points year-on-year fall in HUL's gross margins for the December quarter due to high commodity prices.

Fast moving consumer goods major Hindustan Unilever (HUL) is likely to clock year-on-year revenue growth of 9-12 per cent in the December quarter (Q3FY22) on account of price hikes taken in recent quarters, analysts said. Its volume growth, however, is likely to be flat. The company is scheduled to report its Q3 earnings on Thursday, January 20.  

Brokerages JM Financial, Edelweiss Securities and Kotak Institutional Equities have projected HUL's volume growth at 1-2 per cent, as against a 4 per cent rise in the previous quarter and in Q3FY21. This is due to recent weakness in rural demand and sluggish sales volume growth.

Further, the consumer goods sector is also likely to bear a negative impact of high commodity inflation, which is expected to hit the sector’s gross margins.

This being true for HUL too, analysts expect nearly 200 basis points YoY fall in its gross margins. However, it could relatively perform better on the operating profit (EBITDA) margin front due to its lower advertisement and promotional spends.

“With continuous increase in key raw material prices such as palm oil and crude-based packaging costs, we expect 202 bps YoY contraction in gross margins for HUL. But, a likely 170 bps dip in marketing spends would keep EBITDA margins at 24.5 per cent, or 40 bps higher”, said ICICI Securities.  

The FMCG bellwether may report a 14-24 per cent rise in PAT from a year ago. As per an average of five estimates, the company could post revenues of Rs 13,018 cr, PAT of Rs 2,296 cr and EBITDA margins at 25 per cent for the reporting quarter.

In the period between October-December, HUL’s stock has fallen 12.6 per cent, underperforming the benchmark Sensex and the BSE FMCG index, which fell 1.5 per cent and 7.3 per cent, respectively, during this time.

Here are some projections from top brokerages:

ICICI Securities

The brokerage expects the company to report a 10.6 per cent YoY revenue growth, mainly led by price hikes taken in home care, beauty and personal care category (BPC). It estimates sales of home care, BPC & foods business to have grown 11.8 per cent, 9 per cent and 6.9 per cent, respectively. Operating profit growth of 12.5 per cent and sharp increase in other income would drive net profit to grow at 18.5 per cent, it said.

Kotak Institutional Equities

Analysts have projected deterioration in rural demand for HUL, with urban growth outpacing it. The brokerage also expects continued market share gains for HUL. On the gross margin front, it estimates a 210 bps points YoY contraction due to broad-based inflationary pressures. But, it has pegged operating profit margins at 25 per cent, up 40 bps points sequentially, and 90 bps points annually.

Edelweiss Securities

The brokerage sees HUL’s revenue and PAT growth to be 10 per cent and 19 per cent YoY, respectively. In comparison, the revenue growth was higher at 30 per cent in the year-ago period. It also expects the company's operating profit to have grown 13 per cent year-on-year, as against 16.7 per cent last year. 

“HUL will be one of the few consumer companies that would see EBITDA margin expansion in Q3FY22 on both quarterly and yearly basis”, it said, projecting this metric at 24.8 per cent, up 37 basis points from last year.

Key monitorables

Commentary on rural outlook and impact of the slowdown in this business would be critical. Pricing actions, new launches and degree of margin protection from the incremental price hikes taken during the previous quarters will also be keenly watched.