HUL sees weak demand, but there is some respite on margin front


Hindustan Unilever Ltd (HUL) continues to face the double whammy of subdued demand and elevated commodity costs. But the good news is cost pressures are easing gradually as palm oil prices are falling from recent highs. This commodity and its derivatives are important ingredients in the making of soaps, biscuits and noodles.

Palm oil prices have retreated below the $1,300 per tonne mark which is significantly down from the peaks of $1,800-1,900 per tonne, note analysts at Edelweiss Securities in a report on 17 June. “We are enthused by this deflation, but its sustainability remains to be seen. Recent sharp rate hikes, liquidity drying-up and risk-off bode well for commodity deflation,” added the report. Also, the inflation in tea price has softened, which is another positive.

However, crude-related inputs continue to remain high, posing headwinds for margin. As such, the margin is likely to remain under pressure for a while. In the March quarter (Q4FY22), HUL’s Ebitda (earnings before interest, tax, depreciation and amortisation) margin had contracted by 27 basis points (bps) year-on-year (y-o-y) to 24.1%. One basis point is one hundredth of a percentage point. Note that Ebitda margin had risen by 99bps to 25% in Q3FY22.

The company aims to resort to price hikes as the last measure. It would first focus on cost savings. But there is no respite on the demand front. Analysts at Jefferies India recently met the management of HUL where the latter stated that adversities in macro environment have resulted in industry trends being muted. Though there is value growth owing to price hikes, volumes have declined. Recall that HUL had clocked flat volume growth in Q4FY22.

Rural demand continues to be weak but the expectation of a normal monsoon should augur well. The company further noted that smaller unit packs are seeing higher momentum but there are no signs of downtrading. The consumer discretionary segment is more impacted due to slowdown when compared to essentials.

In Q1FY23E, Edelweiss expects HUL to see volume growth of 3-4% y-o-y, largely due to a favourable base (Q1FY22 grew 9%, Q1FY21 dipped 8%). “With this, we expect about 15% revenue growth year-on-year in Q1FY23E. However, we expect margins to compress on a quarter-on-quarter/y-o-y basis,” said Edelweiss’ analysts.

Investors have acknowledged the tough business environment. While shares of HUL were more than 4% up on Monday on the National Stock Exchange, they have declined by nearly 7% so far in the calendar year 2022. During the same timeframe, the sectoral Nifty FMCG index is down 1.5%.

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