Urban blues now haunt HUL; hopes high on rural

Mumbai/New Delhi: India's largest household goods company Hindustan Unilever Ltd (HUL) on Wednesday highlighted a slowdown in urban markets—especially in larger cities, echoing rival Nestle that experienced demand deceleration in megacities.

Yet, the maker of Vim bars and Pond’s range of personal care products remained optimistic about rural markets, which are showing signs of gradual improvement.

"Urban growth has trended downward, especially in the larger cities, which have been the engine of FMCG growth for some time. We have observed a slowdown across channels and segments,” Rohit Jawa, CEO and managing director, HUL, said at a press conference after the company missed analysts' estimates for both revenue and profit in the second-quarter results on Wednesday.

The management attributed the demand slowdown in urban markets to elevated food inflation and the statistical impact of a high base in the comparable year-ago period.

Also read: HUL Q2 Results: Net profit drops 4% to ₹2,612 crore

Meanwhile, rural growth is steadily picking up for the fast-moving consumer goods (FMCG) market.

"Rural growth is gradually coming back and has now surpassed urban growth for at least a few quarters, even in this quarter. Rural areas are growing steadily, though it is not a dramatic change. The trend is positive. Factors like favourable weather, a good monsoon, and positive outcomes from the kharif crop bode well for rural demand," Jawa said. "Rural growth is crucial, as it represents about a third of our business and is also significant for the broader economy since a large part of India’s population lives there.”

The overall growth has been “tepid” and will remain so in the near-term with rural overtaking urban in the longer-term.

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

The company reported a 3.86% year-on-year (y-o-y) dip in the September-quarter profit. Net profit for the quarter stood at ₹2,612 crore, compared to ₹2,717 crore a year ago.

Sales rose 1.51% to ₹15,508 crore from ₹15,276 crore a year earlier. The quarterly revenue included a one-off credit from a favourable resolution of a past indirect tax litigation.

A Bloomberg poll of analysts had pegged HUL’s standalone revenue at ₹15,790 crore and a net profit of ₹2,680 crore.

The company reported underlying volume growth of 3% during the quarter, lower sequentially but higher y-o-y. In the same quarter last year, the company had reported a volume growth of 2%.

Jawa said premium-priced products continue to grow ahead of mass and popular-priced products, indicating stress in middle-income households.

“The premium end is growing faster, and the upgradation journey in the country resolutely continues. We must stay focused on the long-term opportunity here, as India's per capita consumption is still quite low, and there are plenty of opportunities for growth,” he said.

HUL has been driving the premuimization (selling higher quality, higher-priced goods) agenda with more premium launches hitting retail shelves this quarter under brands such as Tresemme hair products and Comfort fabric cleaners.

The company announced an interim dividend of ₹19 per share and a special dividend of ₹10.

The ice cream hive-off

On 6 September, the board of directors appointed an independent committee to evaluate the prospects of the company’s ice-cream business following parent Unilever’s decision to spin off the vertical. Based on the independent committee’s recommendation, the board has announced its decision to separate the ice-cream business, the company said in a separate filing Wednesday.

Ice-cream, which contributes 3% to HUL’s turnover, is a high-growth category that needs significant investments to realise its full potential, the company said.

“There are two modes of separation: we could either sell the business or de-merge and list it. Both options are being evaluated. An independent committee has been appointed to assess the best path forward, with the main objectives being to maximize shareholder value and minimize business disruption. By the end of the year, we expect to have clarity on which route we will choose,” Ritesh Tiwari, chief financial officer at the company, said.

Meanwhile, after a period of benign commodity costs, the company is being forced to raise prices across packaged tea and skin cleansing. During the quarter, palm oil and tea experienced y-o-y inflation of 10% and 25%, respectively.

Also read: Unilever’s ice-cream business hive-off: Should HUL follow its parent’s exit?

The company has initiated calibrated price hikes to balance “inflation costs with competitive pricing”, the management said. “There are two or three commodities that impact Hindustan Unilever by and large—crude oil, palm oil, and tea. Crude oil is behind at this point in time...but we have seen inflation of 10% year-on-year in palm oil and 25% inflation in tea. In the December quarter, you will see calibrated price increases in skin cleansing and tea. The increases are being phased in over the quarter. We take into account how our competitors react before making the final decisions on pricing adjustments. In this regard, our price increases in December will ensure overall value growth that is ahead of volume growth,” Tiwari said.

The company also slashed advertising and promotion spends this quarter—down 14.8% year-on-year in line with “overall market conditions”.

During the quarter, the company’s home care business grew 8% with high-single digit volume growth. Growth was broad-based with both fabric wash and household care growing volumes in high-single digit. Food and refreshment was a drag, with a low-single digit volume decline. Beauty and wellbeing grew 7%.

HUL will continue to drive premiumization, reshape its portfolio in high-growth spaces, leading in channels for the future, it said.