Hindustan Unilever: Q2 volume growth to be tepid

Demand contraction across categories to hurt topline while forex fluctuations may impact profitability from Q3

As corporate India braces itself for another earnings season, Hindustan Unilever has conveyed to analysts that the second quarter is not likely to be any better than the first, as far as volume growth is concerned.

The company’s volume growth has fallen from high single digit to 5% in recent times and the trend has persisted in the Q2. During an interaction with analysts, HUL has conveyed that pressure points, from a demand perspective, have not changed.

While slowdown in consumption is largely secular, rural India is holding up better than urban.

And despite the good monsoon this year, the company expects volume growth for the second quarter to be similar to levels seen in the first quarter of the fiscal. The slowdown in consumption is more pronounced with discretionary spends coming down sharply during the second quarter.

Edelweiss Securities says: “Our recent interaction with the Hindustan Unilever (HUL) management reaffirms our view that growth pace in discretionary categories (personal products, ice creams) continues to moderate. We expect volume growth to be tepid in Q2FY14 as well.”

Another trend that’s visible is that the strategy to premiumize is not working as well with consumers as they have become price-sensitive. HUL’s premium portfolio is growing in line with the industry and not ahead of it, as it was doing a few quarters ago.

Also competitive intensity has increased across several key categories. The laundry and oral care segment are of concern to analysts as volume growth has slowed noticeably in both segments as competitive intensity increasing.

The personal care segment, which is a high margin business, has seen demand collapse completely in the second quarter. According to Kotak Institutional Equities, Volume growth for the overall skin-care market may have turned negative in 2QFY14, from flat year-on-year in 1QFY14 and mid-teens only a year back.

Hindustan Unilever has been facing some issues with Fair & Lovely brand with demand coming under pressure. The company has re-launched the brand and gone back to the white colour of the crème after switching to pink earlier. The company has also increased the price of the sachet from Rs 7 to Rs 8. Analysts are not sure if both steps would help revive demand for the product.

The rupee’s fall too is expected to impact the company’s profitability, but from the third quarter onwards. Increase in crude and fall in the rupee would have impacted margins. However, HUL has conveyed that it would like to keep price hikes below input cost inflation.

There is unlikely to be any material impact on profitability in the second quarter as the company has hedged rupee risk. However, from the third quarter the company would need to take calibrated price hikes to offset increase in raw material costs.