Hindustan Unilever: Q2 numbers point to a slowdown

Volume growth of 7% and 12% growth in personal care category worry analysts

Hindustan Unilever Ltd (HUL) in recent times has become the flag bearer of India’s consumption story. Quarter after quarter, the company has posted double-digit growth, even as peers feel the heat of slowing demand. While the company’s revenue and earnings growth in the second quarter continue to show this trend, the numbers are a tad below consensus estimates. The volume growth of seven per cent has also disappointed. The company’s revenues have grown by 12.5 per cent to Rs 6,310 crore and earnings before interest, taxes, depreciation and amortisation expanded by 18.2 per cent to Rs 970 crore.

There are two main highlights in this quarter. First, HUL’s operating margins expanded by 74 basis points to 15.5 per cent, which helped the company’s earnings growth. Emkay Global’s analysts say the margin expansion was driven by 180 basis points lower raw material costs, which was partially offset by higher ad spends (up 60 basis points YoY). Secondly, volume growth in the quarter has been hurt by “the budget rationalisation in the Canteen Stores Department (CSD)”. It isn’t clear whether the slowdown is entirely because of canteen sales or if this is a secular slowdown. Analysts say the company, which so far has managed to show no obvious sign of a slowdown, is now talking of discretionary spends coming under pressure.

This quarter’s growth has been largely driven by the soaps and detergents segment, which grew 22.5 per cent. For several quarters now analysts have been saying it is a low-margin segment and will see profitability come under pressure if competition increases. However, margins for the segment have expanded 190 basis points to 14.3 per cent. Rikesh Parikh of Motilal Oswal Securities, says: “This is significant beat versus our expectations of 12.6 per cent.”

While growth in the low-margin and commoditised soaps and detergents business is healthy, it’s not inspiring, explain analysts. Analysts are now worried as the 12 per cent growth seen in personal care products could well be an indicator of things to come. Parikh says moderation in volume growth, higher-than-expected margin expansion in soaps & detergents and sedate revenue as well as EBIT growth in the personal products segments are key highlights. The company’s food business has also clocked single digit growth. The domestic consumer business (FMCG and water) grew 16 per cent. The home and personal care business grew 17.6 per cent while the foods business grew 9.2 per cent. The market will keenly watch out for volume growth in the coming quarters, as it will determine future valuations.