Hindustan Unilever (HUL) is expected to report muted numbers for the second quarter of the financial year 2020 (Q2FY20) due later in the day. The results come at a time when the consumer goods sector has been struggling against low growth for the past two quarters, primarily owing to the consumption slowdown in rural India. Going by the analysts' view, this trend is likely to continue.
“After eight quarters of continued outperformance, rural growth slipped below urban growth for several consumer staple companies in Q2FY20. Additionally, the on-going liquidity concerns, succession of drought and floods during the monsoon season in large parts of the country, and muted initial response to the festive season added to the woes,” said analysts at Motilal Oswal Financial Services (MOFSL) in a recent report.
Those at Edelweiss Securities expect Q2FY20 to see the slowest volume growth for consumer goods companies since Q1FY18, which was impacted by GST-related destocking.
Here's a look at what brokerages expect from the HUL’s Q2 numbers:
Motilal Oswal Financial Services
We expect Hindustan Unilever’s revenue to grow 7 per cent year-on-year (YOY) to Rs 9,880 crore, with underlying domestic volume growth of 6 per cent in 2QFY20. Base quarter volumes were up 10 per cent YOY. Gross margins are likely to be up 140 basis points (bps) YOY to 53.4 per cent. Operating margin is seen expanding 150 bps YOY to 23.4 per cent in the quarter, leading to EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 14.4 per cent YOY. Adjusted PAT (profit after tax) is likely to grow 6.1 per cent YOY to Rs 1,610 crore due to very high other income base in 2QFY19.
Comments on consumer demand environment, pace of rural growth, competitive intensity, especially in detergents, performance of Lever Ayush and WIMI (Winning in Many Indias) growth are some of the key things to watch out for.
We anticipate revenue, EBITDA and PAT to grow 4.8 per cent, 13.1 per cent and 5.8 per cent, respectively, on a YOY basis. We expect HUL to record volume growth of 3 per cent YOY on a high base of 10 per cent YOY. We expect the softness seen in Q1FY20 to continue for the full quarter. On the pricing front, the company has taken price cuts in select soaps portfolio; hence, we expect the pricing gap to be 1.5 per cent against 1.7 per cent in the previous quarter.
Margin expansion, however, would sustain given a benign raw materials basket as well as cost-savings program. This coupled with soft competitive intensity led to ad spends under control. EBITDA is seen at 13 per cent, leading to EBITDA margin expansion of 170 bps YOY. The benefit of a lower tax rate of 25.2 per cent compared with 28.7 per cent in Q2FY19 is partially offset by strong other income in the base quarter (owing to a one-time tax adjustment).
We expect HUL to post 6.7 per cent YOY sales growth mainly driven by 5 per cent volume growth on the back of strong growth in home care segment benefiting from premiumisation trend and from foods & refreshment segment, as new launches are supporting growth. We expect HUL to witness operating margin expansion of 76 bps to 22.6 per cent due to Ind-AS accounting adjustment. We expect net profit to grow 10.6 per cent YOY to Rs 1,687.2 crore driven by a reduction in tax rates.
Antique Stock Broking
We expect HUL's volume growth to remain at 5 per cent YOY during 2QFY20 (volume growth of 5 per cent YOY in 1QFY20), impacted by moderation in rural demand. Overall sales growth is expected to be 7 per cent YOY during the quarter. Further, cost-saving initiatives will continue to lead margin expansion. A&P spends are expected to moderately grow at 3 per cent YOY.
We model 8 per cent revenue growth in the domestic FMCG business led by 5.5 per cent UVG and 2.5 per cent price-led growth. On a segmental basis, we bake in 9.5 per cent YOY revenue growth for home care, 5.8 per cent YOY growth for personal care and 10 per cent YOY growth for packaged food and refreshments.
We expect 270 bps YOY expansion in EBITDA margin aided by GM expansion (150 bps), operating efficiencies (20 bps) and adoption of Ind-AS (100 bps). We expect 16 per cent YOY growth in EBITDA (adjusted for Ind-AS 116). We estimate 17 per cent YOY growth in PBT. Net profit growth would be much higher owing to ETR cut and associated reversal of 1QFY20 taxes; we model 19 per cent ETR for 2QFY20 translating into 25.2 per cent ETR for 1HFY20.