Hindustan Unilever Q3: Steady performance amidst the slowdown

Despite the ongoing consumption slowdown, Hindustan Unilever has been able to maintain the same 5 per cent year-on-year growth in volumes in each of the last three quarters. It has been able to hold volumes by taking price cuts in select categories as well as through product innovations and launches, which have kept customer interest afloat.

With HUL deriving 40-45 per cent revenues from rural sales, the slowdown in the rural economy has been impacting volumes in the last few quarters. According to market research firm Nielsen, growth in rural markets has steadily come down in the last few quarters after peaking at 1.4 times urban sales in the quarter ended September 2018. Rural markets grew only at 0.5 times the urban market in the last three months of 2019. Even in urban markets, discretionary categories such as beauty and personal care have taken a bigger hit, in comparison with staples. HUL has been able to navigate these headwinds to an extent and record a 12 per cent profit growth to Rs 1616 crore, thanks better operational performance.

Sales in the latest quarter grew only at a tepid 3.6 per cent to Rs 9696 crore compared with the volume growth of 5 per cent. Apart from price cuts which pulled down realisations, the 2.8 per cent drop in sales in its biggest beauty and personal care segment (45 per cent of total sales revenues) impacted top line growth. In contrast with home care and foods segments, the beauty and personal care segment was already growing only in low single digits in the June and September quarters.

At the operating level though, there were a few tailwinds. Raw material costs as a percentage of sales came in at 44.9 per cent, lower than the 48.4 per cent recorded a year ago. Advertising spends also declined by about 70 basis points to 11.9 per cent of sales. These along with lower employee and other expenses aided margin expansion. Operating margins came in at 24.9 per cent, a growth of 210 basis points over the year ago period.

Outlook

After recording a 4.1 per cent growth in the first half of this fiscal, the private final consumption expenditure component of the GDP (in real terms) is expected to end the year with a 5.8 per cent rise according to the CSO. Thus, growth in the second half is anticipated to be better than the first half FY20. Until December, the uptick has not been very visible. While HUL has clocked a steady performance in this quarter, measures to boost consumption in the Budget will play a key role in pushing up demand.

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