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HUL’s Q3 is resilient, but times are tough

21 Jan , 2022   By : Kanchan Joshi


HUL’s Q3 is resilient, but times are tough

NEW DELHI : At the onset, expectations from Hindustan Unilever Ltd’s (HUL’s) December quarter (Q3FY22) results were measured. To cope with the steep rise in input costs, the fast-moving consumer goods (FMCG) company increased product prices.


Analysts expected this to adversely impact the volume performance in the quarter and eventually this has played out. HUL’s underlying volume growth last quarter was 2% compared to a 4% growth in Q3FY21. Volume growth also slowed in Q3 compared to Q2.


Nevertheless, HUL’s total operating revenue grew 10.4% year-on-year (y-o-y) to about Rs13,090 crore in Q3. The revenue increase was driven by 23% growth in the home care segment, which was also helped by a favourable base, given that the division’s revenues had declined by 1% in Q3FY21. “Further, aggressive price hikes were taken in the last six months to pass on the high commodity inflation," analysts from ICICI Direct Research said in a first cut note.


As such, the company was able to clock an Ebitda margin expansion of 100 basis points (bps) y-o-y to 25%. Ebitda is earnings before interest, taxes, depreciation, and amortization. One basis point is one-hundredth of a percentage point. Ebitda margins are about 40bps higher sequentially as well. Ebitda margin performance this time was also helped by lower advertising and promotion expenses.


While that augurs well, HUL is cautious and expects margins to remain under pressure from a near-term perspective. Commodity pricing pressures are proving to be relentless, remaining volatile and elevated. The company expects to witness further sequential inflation in the current quarter. At the same time, calibrated pricing actions together with cost-saving efforts are likely to continue.


In the days to come, inflationary pressures can be expected to keep volume growth expectations in check. Moreover, business conditions are expected to remain tough with HUL pointing to a slowdown in the rural market, even as the company has seen handsome market share gains. The economy is still under recovery, HUL’s chairman and managing director Sanjiv Mehta said in a post earnings media call. “The only way for the rural consumers to cope with this kind of inflation would be getting more money in their hands," Mehta said.


In Q3, in the home care segment, growth was broad-based with strong performance in fabric wash and household care. Revenue growth in the beauty and personal care (BPC) segment was 7%, which is a tad underwhelming. In BPC, HUL’s skin cleansing, skin care, and colour cosmetics performed well. Revenue in the food and refreshments segment grew by 3.3% on a strong base. The tea portfolio continued its strong performance, the company said.


“We would rate this quarter’s performance as marginally better than expectation and would expect a positive reaction given the stock has declined sharply over the past few months," Yes Securities Ltd said in a first cut note.


The HUL stock has underperformed the benchmark Nifty50 and Nifty FMCG index over the last one year. The stock has declined by around 4% vis-à-vis the 21% and 6% gain in the Nifty50 and Nifty FMCG index, respectively in the past one year.


Based on Bloomberg data, the stock now trades at about 50 times estimated earnings for financial year 2023.


Some analysts reckon valuations are comfortable given that they have corrected from highs. Even so, subdued rural demand and cost inflation remain key concerns for the stock in the near future, which may keep meaningful upsides at bay.


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