Good Q2 show to support HUL's stock; net profit rises 20%, revenue up 12%

Hindustan Unilever’s (HUL’s) September quarter (Q2) revenues are largely in line with Street expectations, but the good show on volume and profitability fronts along with optimistic outlook are positives and would help support its premium stock valuation.

In Q2, HUL clocked 11.5 per cent year-on-year growth in net sales to Rs 91.4 billion, led by 10 per cent growth in volume. Although it comes on a low base, given that year-ago quarter saw volume growth of 4 per cent, Q2 of 2018-19 (FY19) is the fourth consecutive quarter of double-digit volume expansion. Volume growth was also at the upper band of expectations of 7-10 per cent. According to the management, strong consumer demand sustained in Q2 and rural growth outpaced that of urban, which is likely to persist going ahead. 

Besides, innovation and re-launch of products too supported volume improvement. The volume-led growth was witnessed across businesses enabling its three segments — home care, beauty and personal care, and foods and refreshment report 10-12 per cent topline growth. Although, the management said the oral care business performance was below its expectations, it clarified that this portfolio needs more work.

Despite high inflationary pressure, HUL continued to improve its profitability. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin expanded by 162 basis points year-on-year to 22 per cent, thanks to price hikes and cost improvement. Its other operating expenses, as a percentage of operating revenue, dipped 154 basis points year-on-year. The margin improvement was also for robust sale of premium products in some categories such as personal wash and fabric wash. All the three segments delivered 160-200 basis points expansion in operating margin. HUL’s net profit, post extraordinary items, thus rose by 19.5 per cent to Rs 15.25 billion, and was a bit ahead of estimates.

Analysts expect this momentum to persist. “HUL has demonstrated good volume performance, which is likely to remain healthy on two-year annual growth basis in coming quarters. Though crude oil and currency hiccups are there, given lag effect HUL is better placed to manage any such pressure,” said Nitin Gupta, analyst at SBICAP Securities.

After the recent correction across the fast-moving consumer goods (FMCG) sector, HUL currently trades at 46 times its FY20 estimated earnings, which is on the higher side in the industry. However, post Q2 numbers announced on Friday after market hours, and management indicating that demand outlook remains stable and they remain focused on volume growth and margin gains, analysts believe that HUL’s premium valuation will sustain. And, the recent correction offers good buying opportunity.