Hindustan Unilever: Q2 volume growth to be tepid

Demand contraction across categories to hurt top line while forex fluctuations could impact profitability from Q3

As corporate India braces for another earnings season, Hindustan Unilever (HUL) has conveyed to analysts that the second quarter is not likely to be any better than the first as far as volume growth is concerned. The company's volume growth has fallen from high single digit to five per cent in recent times and the trend has persisted in Q2. During an interaction with analysts, HUL has conveyed that pressure points, from a demand perspective, have not changed. While slowdown in consumption is largely secular, rural India is holding up better than urban.

And, despite the good monsoon this year, the company expects volume growth for the second quarter to be similar to levels seen in the first quarter. The slowdown in consumption is more pronounced, with discretionary spends coming down sharply during the second quarter. Edelweiss Securities says: "Our recent interaction with the Hindustan Unilever management reaffirms our view that growth pace in discretionary categories (personal products, ice creams) continues to moderate. We expect volume growth to be tepid in Q2 of FY14 as well."

Another visible trend is that the strategy to premiumise is not working as well with consumers, as they have become price-sensitive. HUL's premium portfolio is growing in line with the industry and not ahead of it, as it was doing a few quarters ago. Also, competitive intensity has increased across several key categories. The laundry and oral care segment are of concern to analysts as volume growth has slowed noticeably in both segments, with competitive intensity increasing. The personal care segment, a high margin business, has seen demand collapse completely in the second quarter. According to Kotak Institutional Equities, volume growth for the overall skin-care market could have turned negative in Q2 of FY14, from flat year-on-year in Q1 of FY14 and mid-teens only a year ago. HUL has been facing some issues with the Fair & Lovely brand with demand coming under pressure. The company has re-launched the brand and gone back to the white colour of the creme after switching to pink earlier. The company has also increased the price of the sachet from Rs 7 to Rs 8. Analysts are not sure if both steps would help revive demand for the product.

The rupee's fall, too, is expected to impact the company's profitability, but from the third quarter onwards. Increase in crude and fall in the rupee would have impacted margins. However, HUL has conveyed that it would like to keep price hikes below input cost inflation. There is unlikely to be any material impact on profitability in the second quarter as the company has hedged rupee risk. However, from the third quarter, the firm would need to take calibrated price increases to offset increase in raw material costs.