HUL does not expect demand to revive soon

Margins may come under pressure as Q4 volume growth may fall from 4% in Q3 and input costs are likely to rise

Hindustan Unilever (HUL), the country’s largest fast moving consumer goods company, has conveyed to analysts that it sees no green shoots yet and remains cautious on demand. The March quarter is expected to see volumes grow by three per cent compared to the four per cent growth witnessed in the December quarter. The company refused to predict a recovery of any kind. Revenue growth is expected to come under pressure in the fourth quarter, as it is expected to be hurt by weak demand and rising input costs. In the face of weak demand, the spike in input costs have not been passed on entirely.

According to Kotak Institutional Equities, volume growth is likely to dip sequentially to three per cent in the fourth quarter versus four per cent in the third quarter due to weak demand. Also, the fourth quarter volume growth jumped 80 basis points to 6.3 per cent because of stocking up done by distributors on fears of a transport strike.

The deceleration in volumes is expected to be more broad-based and not just restricted to discretionary items. Soaps and detergents may see some uptick in value terms on select price rises but volume growth is expected to weak. Personal products will continue to struggle as demand has collapsed for discretionary products like skincare.

Also, to make matters worse, competitive intensity has worsened across segments, especially oral care. With the company not seeing a revival in demand soon, in the coming quarters its profitability will come under pressure as input costs have been on the rise but the company might not be able to pass it on to consumers. The prices of palm oil are up 17 per cent, as also are prices of coffee. In addition, the spends on advertising and promotions will continue to be higher, also impacting margins.

Analysts are taking a cautious view on the stock as the gross margins are set to come under pressure, not only because of cost push and weak demand but due to higher royalty payouts. The Street expects the gross profit margin and operating profit margin to remain under pressure in the coming quarters. All these factors put HUL’s premium valuations at risk. Historically, HUL has traded at an 82 per cent premium to the Sensex, which has risen to 117 per cent in recent times. With the growing concerns on moderating sales volume and increasing pressure on profitability, Sharekhan expects the gap between valuations of HUL and the Sensex to get narrower in the coming quarters.