HUL delivers a decent performance in Q2 amid economic slowdown; sales up 6%

Amidst slowdown, net sales grew 6 per cent led by volumes, EBITDA margin expanded by 293 basis point and net profit by 21 per cent

The September 2019 quarter (Q2) results of fast-moving consumer good (FMCG) major Hindustan Unilever (HUL) was a tad better than the Street’s expectations. While net sales grew by 6.2 per cent year-on-year to Rs 9,708 crore, net profit jumped 21.2 per cent to Rs 1,848 crore, compared to expectations of Rs 9,784 crore and Rs 1,795 crore, respectively, according to Bloomberg consensus. Benign raw material prices fuelled operating margins despite the moderation in volume growth, which, too, was ahead of analyst expectations.

HUL reported a 5 per cent growth in volumes in Q2, versus analyst estimates of around 4 per cent growth, weighed down by a continued slowdown in rural demand and the liquidity crunch. About 40 per cent of HUL’s business comes from rural pockets which grew by just 0.5 times that of urban sales, as compared 1.5-2 times in the past. While the 4-6 per cent price cuts in some soap brands confined the moderation in overall volume growth, lower input cost inflation helped negate the impact of price cuts on gross profit margin. 

Prices of key inputs, such as palm fatty acid distillate (PFAD), were down 13-20 per cent year-on-year in Q2, leading to a sharp 233 basis point year-on-year expansion in gross profit margin to 53.8 per cent, the highest in at least six years. Together with an improved product mix, HUL witnessed a sharp 293 basis point year-on-year expansion in Ebitda (earnings before interest, tax, depreciation and amortisation) margin to 24.8 per cent. Even if the changes in accounting norms are adjusted for, the Ebitda margin is up about 200 bps. The lower corporate tax, benefits from which HUL plans to largely retain, also supported net profit growth in Q2.

However, the management is still cautious about the near-term demand outlook and would take further price cuts in the December quarter to drive volumes.

Shirish Pardesh, analyst at Centrum Broking, believes slower volume growth, mainly from rural areas, in the past couple of quarters is also likely to have impacted the pace of market share gains by HUL, and how quickly it gets this back would be the key. HUL’s pricing action suggests a volume uptick is eminent, adds Pardeshi, who also does not see any major price correction in the stock on demand worries.

Benign input costs, GlaxoSmithKline Consumer Healthcare merger, and corporation tax cuts would be key earning enablers. HUL expects key raw material prices to remain benign in the next 6-9 months.

Overall, investors could wait until more clarity emerges on the demand front given the pricey stock valuations of over 50 times FY21 estimated earnings.