Covid-19 crisis: HUL hints at margin pressures, higher operating costs

"Distribution costs have significantly increased and there will be short-term pressure on margins," Sanjiv Mehta, chairman and managing director said.

The Covid-19 pandemic has been a ‘black swan’ moment for most businesses and Hindustan Unilever (HUL), the country’s largest consumer goods company, has been no exception, Sanjiv Mehta, chairman and managing director, said in his address to shareholders on Tuesday. 

Speaking at the company’s 87th annual general meeting (AGM) held virtually in compliance with regulatory guidelines, Mehta hinted at margin pressures and higher operating costs of running the business during a pandemic. 

“Distribution costs have significantly increased and there will be short-term pressure on margins,” he said. 

Mehta also said the June quarter financial performance would be ‘soft’ because of the challenges the company has had to navigate in the period. The January-March period had seen HUL report 7 per cent decline in volume growth, faring even worse than the demonetisation quarter (October-December 2016), when the fall was 4 per cent. 

“We went from 5 per cent capacity utilisation at the end of March, when the national lockdown was announced to gradually increasing our manufacturing capacity in April-June. While 75 per cent of our portfolio caters to essential products in health, hygiene and nutrition, 20 per cent is discretionary, which has been under stress, and 5 per cent, which was severely impacted because of the lockdown,” he said. 

The 20 per cent of the business Mehta is referring to includes categories such as hair care, skin care and cosmetics, whose sales have suffered because of the focus on essential products by people in general. The 5 per cent of the business includes water purifiers and ice creams, Mehta said. Sale of ice creams, in particular, was hit hard in the April-June period, he said.

While capacity utilisation at HUL’s plants has improved to nearly 100 per cent now, and most of its distributors were operational, Mehta said it would still be difficult to assess the nature of demand, since disruptions would take time to subside. 

On the brighter side, at least 10 different products largely in the health and hygiene space, including several formats of Lifebuoy sanitiser, a Domex sodium hypochlorite-based spray, Lifebuoy laundry sanitiser and Surf Excel laundry powders, with enhanced germ kill, were rolled out in the past two months, Mehta said. 

The company also fortified Horlicks with zinc and took it to market, even as the company welcomed 3,600 employees of GlaxoSmithKline Consumer into HUL following the completion of the merger in April, Mehta said.  

At the same time, production of items, such as hand sanitisers, was ramped up by a factor of 100 and the company quickly added new lines to cater to the demand for health and hygiene products. 

The September quarter will give us a good indication of the nature of demand, Mehta said, adding the steps the government was taking to improve demand in rural areas were noteworthy. 

“The recent steps taken by the government augurs well for the rural areas,” he said. “This includes everything from the direct cash transfers to the increased allocation to the Mahatma Gandhi National Rural Employment Guarantee Act. The monsoon spread has also been good,” he added. 

HUL derives 40 per cent of its total sales from rural areas, higher than the industry average of 33-35 per cent. Recently, the company has increased its direct reach into rural areas, apart from tapping rural women as entrepreneurs under the Shakti programme to improve sales. Currently, the company has 120,000 Shakti entrepreneurs, selling HUL products at the community level.

According to Mehta, HUL has also used technology to navigate the lockdown. “In some areas our salesman could not physically reach the stores. The app-based ordering capability was quickly launched to these stores to restore our ability to capture orders and meet consumer demands,” he said. 

Similarly, extensive data about retail stores and markets to be serviced helped HUL to re-design its distribution model and create new optimised routes for delivery during the lockdown.

“The power of automated warehousing kicked in and enabled us to deliver to stores even in situations where the distributor was not operational,” he added.