HUL Q3 surpasses estimates even as rural growth remains impacted

The country’s largest fast-moving consumer goods (FMCG) major, Hindustan Unilever (HUL) posted better than expected performance for the quarter ended December 2021 (Q3FY22) on all fronts, sales, operating profit and net profit. It also posted better than industry growth across its business categories. However, the commentary was worrying as the company management said that the operating environment remains challenging, as rural volume growth for the industry in the December ended quarter (Q3FY22) continued to stay in negative territory, citing Nielsen’s market growth numbers.

Volumes started to contract in rural areas from August of last year, according to data by Nielsen shared by in its presentation.

Sanjiv Mehta, chairman and managing director of said in its post earnings call while addressing weak demand, “We are very pleased that we have remained competitive, grown our market share and protected our business model.” But, Mehta pointed out that there needs to be more money in the hands of the rural consumer.

The company reported volume growth of 2 per cent in the third quarter of FY22. Ritesh Tiwari, CFO at explained that almost 30 per cent of HUL’s business comes from packs that operate at price points like Re 1, Rs 5 and Rs 10 and in these packs HUL prefers to reduce grammage instead of increasing prices which resulted in volume decline despite selling the same number of units. “This had a circa 2 per cent impact on our volumes,” Tiwari explained.

The company said that it is significantly ahead of the market volume growth.

In the October-December quarter, HUL’s consolidated revenue increased 10.3 per cent year-on-year (YoY) to Rs 13,439 crore. While its operating margins expanded by 105 basis points and was at 25.8 per cent. Its net profit was also up by 18.6 per cent YoY in the quarter at Rs 2,297 crore. Bloomberg pool of analysts had revenue at Rs 13,051.5 crore, and net profit at Rs 2,225 crore.

Mehta said that the relief provided by the government in the last two years to the rural consumers, needs to be extended in the new fiscal year. “Things like MNREGA outlay may have to increase further and also free food supply, because the (Indian) economy is still in the process of recovering,” Mehta said. Adding: “The economy is recovering and at the end of this fiscal year, the economy will be the same size it was two years back.”

Mehta also said that in his view there are two things which could be done to propel volume growth, one is once inflation starts to come down then prices are also adjusted and second would be if the government could help in the intervening period and put more money in the hands of the people.

The maker of Lux soaps has seen its market share increase both in rural and urban and across all its divisions and price segments, Tiwari said.

Tiwari said that the operating environment remains challenging. market growths are moderating and consumers are titrating volumes owing to significant inflation.

He also called out commodity headwinds which are challenging for the industry.

“In the near term, the operating environment looks challenging, and we expect to see sequentially more inflation in the March quarter compared to December quarter,” Tiwari said. Adding, “We will continue to manage our business with agility and take all steps required to protect our business model and grow our consumer franchise while maintaining our margins in a healthy range.”

Tiwari pointed out that two commodities which are impacting its business are palm oil which goes into its skin cleansing business, soap business and the hair business. Crude oil and its derivatives are used in its laundry business, homecare business and overall household care business.

HUL sees two thirds of its business is exposed to commodities.

In its tea business, the company has seen some prices of tea come off from its highs due to good production but it still remains higher compared to 2020.

PhillipCapital said in its report on HUL,” In our view, gross margin should partially recover in coming quarter, on back of price hikes taken, reduction in consumer and trade promotions, improved contribution from high –margin HFD (health food drinks) portfolio and increased footfalls in modern trade outlets once fears relating to Covid-19 subsides as it is critical for high margin premium detergent portfolio and personal care portfolio.”

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