Unilever's Q3 sales indicative of HUL's muted performance

HUL's volume growth to remain 5%, as discretionary spends stay slow and competitive intensity picks up

Unilever, the world’s second-largest consumer goods company, reported a revenue growth of 4.1 per cent in the December quarter of 2013. Driven by stronger demand in emerging markets, the company’s sales growth improved from the 3.5 per cent levels in the October quarter.

Interestingly, India has not contributed much to its parent’s revenue growth. In a call with analysts, Unilever's management conveyed its strong revenue growth was driven by Russia, Turkey, China and Indonesia. Analysts claim India's contribution to the emerging market growth would not be significant. This implies Hindustan Unilever's performance in the December quarter would also be weak.

Barclays is underweight on the Hindustan Unilever stock, as it believes macro headwinds are likely to keep consumption patterns in check and the company's significant presence in intensely competitive segments such as soaps and detergents will also hurt volumes.

Also, the firm’s strategy to premiumise is expected to get stalled on slowing discretionary spends. In fact, the Street believes that HUL is expected to underperform its peers, too, as demand for both home and personal care products is expected to have decelerated sharply. The slowdown in staples has only worsened. Channel checks by Emkay Global suggest that volume growth in highly-penetrated categories such as soaps and detergents could be down to zero to three per cent from four-five per cent, while oral care volumes are expected to decline from five-six per cent from eight-nine per cent.

Urban discretionary spends are significantly down and analysts believe this trend is unlikely to reverse in a hurry. Consumer durables have declined in double digits for consecutive years now. With urban wage growth remaining muted, a pick-up in spending is unlikely. Religare Institutional Research expects HUL to deliver an 11 per cent year-on-year growth in revenues and net profit, on muted volumes and weak realisations.

IIFL expects the company to report a nine per cent growth in revenue, which would be driven largely by the home and personal care business. Analysts expect the company to report an underlying volume growth of five-six per cent annually. While operating margins are expected to remain flat year-on-year, advertising and marketing spends could erode net margins.