Markets signalling green shoots in recovery: HUL’s Jawa

Mumbai: Consumer goods maker Hindustan Unilever Ltd on Tuesday said signs of green shoots in rural markets have surfaced with the company’s low-priced packs seeing strong offtake and categories such as hair care and soaps doing well.

A progressing monsoon as well as Tuesday's measures announced by the government to invest in the agrarian economy as well as expand the rural budgets could augur well for consumption in India’s hinterland. HUL's earnings were announced the same day the government announced its Union budget for the year.

“Monsoon, which is an important factor to agriculture and therefore rural economy, is trending in the right direction. We will have to wait and watch, but we are hopeful there are green shoots; we will continue to deepen and strengthen our competitive moat in rural areas,” Rohit Jawa, CEO and managing director, said addressing reporters virtually. 

HUL’s first quarter performance reflects decisive actions of transforming its portfolio in high growth spaces aided by gradual recovery of rural markets, the company said.

India’s largest household goods maker reported a 2.6% increase in June quarter profit. Net profit for the three months ended 30 June stood at ₹2,538 crore up from ₹2,472 crore a year ago, the company said in a statement to the stock exchanges.

HUL’s performance is viewed as a proxy for the broader Indian consumer sentiment.

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Sales were up 1.26% at ₹15,339 crore from ₹15,148 crore a year earlier, due to the impact of price reductions taken during the year as the company passed on benefits of lower commodity prices to consumers. 

Total expenses during the quarter were up 1.5%; the company pumped more money into advertising its brands; A&P spends were up 11% year-on-year.

A Bloomberg survey of 21 analysts expected the company to report a profit of ₹2,560 crore. Standalone revenue estimates stood at ₹15,325 crore.

HUL reported underlying volume growth of 4% in the June quarter inching up slightly after three consecutive quarters of reporting volume growth of 2%. 

Commenting on signs of recovery in rural markets Jawa said the closest signal the company gets is in market growth and market growth in the recent past has been, in volumes, ahead of the urban areas.

“That used to be a secular trend in the past, that in the recent months and quarters has also been the case. Although, if you look back over a two year CAGR (compound annual growth rate), rural growth is still slightly behind and lagging urban, but we see that changing with the growth rates in the recent past. The second green shoots we see are many of our very highly rural focused portfolios, probably also helped by hot summer, such as hair care, low unit price packs, or our personal wash portfolio, which has also clocked positive volume growth,” he said.

Gross margins at 50.9% expanded 171 bps year-on-year and contracted 44bps quarter-on-quarter.

The company’s personal care portfolio delivered low-single digit growth in volumes while sales growth dipped 5% year-on-year. Skin cleansing portfolio comprising soaps saw revenues decline during the quarter on account of pricing actions taken, the company said. 

Home care comprising fabric cleaners and detergents reported a 4% jump in quarterly sales and “high” single digit volume growth. Foods and refreshment had a sales growth of 1% with volumes remaining stable. Beauty and wellbeing that was spun off as a separate business unit late last year reported its first standalone results. The segment comprising brands such as Sunsilk, Clinic Plus and Dove reported a 3% jump in year-on-year sales.

During the quarter, the company relaunched Vim bar and Ponds personal care portfolio.

The company expects to go easy on pricing actions going forward after it already initiated pricing changes—both cuts and increases—in the market. “Whatever price corrections we had to do because of commodity changes, we have already executed in the market. There were few more in this quarter we had to do especially in the area of mass skin cleansing. There are some corrections in tea we did during the quarter. As we speak, all of the work that we had in terms of making price changes in response to commodity prices has been done. In the short term, we expect pricing to be near zero—if commodities remain where they are today,” Ritesh Tiwari, CFO, HUL, said.

For HUL net material inflation, which is the absolute inflation that the business faces after factoring in all savings and efficiencies, has been negative or deflationary since the June quarter of last year.

Analysts were impressed with a 4% jump in volumes. "Results were expected to be muted given the impact on demand due to heatwaves impacting hot beverages and out of home consumption. The 4% volume growth is decent in a tough quarter, ahead of our expectations of 3%. The company exhibited good control on costs and increased ad spends which is the right strategic step given impending rural recovery,” said Abneesh Roy, executive director, Nuvama Institutional Equities.

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Analysts at Jefferies said HUL’s June quarter growth was slightly ahead of their estimates, with better volume and in-line pricing (but below consensus pricing). “Gross margin expansions missed consensus. HUL guides to no pricing contribution to growth this year (given current input cost levels) and expects Ebitda margin to be flat as well. These are broadly both metrics that are in-line with current consensus,” they said.