HUL Q3 surpasses estimates even as rural growth remains impacted

Net profit up 18.6% on 10.3% rise in revenue; says near-term outlook uncertain as growth moderating, inflation high

Hindustan Unilever, the country’s largest fast-moving consumer goods (FMCG) major, posted better than expected performance for the quarter ended December 2021 (Q3FY22) on all fronts -- sales, operating profit, and net profit.

It also clocked better than industry growth in its business categories. However, the commentary was worrying because the company management said the operating environment remained challenging as rural growth in volumes for the industry in the December ended quarter (Q3FY22) continued to stay in negative territory, citing Nielsen’s market growth numbers.

The volumes started contracting in rural areas from August last year, according to the data by Nielsen shared by HUL in its presentation.

Sanjiv Mehta, chairman and managing director of HUL, said in its post-earnings: “We are very pleased that we have remained competitive, grown our market share and protected our business model.”

But Mehta pointed out there needed to be more money in the hands of the rural consumer.

The company reported growth in volumes of 2 per cent in the third quarter of FY22.

Ritesh Tiwari, chief financial officer at HUL, said almost 30 per cent of the company’s business came from packs that had prices like Rs 1, Rs 5, and 10, and in these packs HUL preferred to reduce the weight instead of increasing prices, which impacted its volume despite selling the same number of units. “This had a circa 2 per cent impact on our volumes,” Tiwari said.

The company said it was significantly ahead of market growth in volumes.

In the October-December quarter, HUL’s consolidated revenue increased 10.3 per cent year-on-year (y-o-y) to Rs 13,439 crore. While its operating margin expanded by 105 basis points and was at 25.8 per cent, its net profit was also up by 18.6 per cent y-o-y in the quarter at Rs 2,297 crore.

A Bloomberg pool of analysts had revenue at Rs 13,051.5 crore and net profit at Rs 2,225 crore.

Mehta said the relief provided by the government in the last two years to rural consumers needed to be extended in the new fiscal year.

“Things like the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) outlay may have to increase further, and also free food supply, because the (Indian) economy is still in the process of recovering,” Mehta said.

“The economy is recovering and at the end of this financial year, it will be of the same size it was two years back.”

There were two things, he said, that could be done to propel volumes growth: One is once inflation started to come down, prices could be adjusted; and two, the government could help in the intervening period and put more money in the hands of the people.

The maker of the Lux soap has seen its market share increase both in rural and urban areas, and across all its divisions and price segments, Tiwari said, adding, the operating environment remained challenging.

He also called out commodity headwinds, which are challenging for the industry. “We expect to see sequentially more inflation in the March quarter than in the December quarter,” Tiwari said.

PhillipCapital said in its report on HUL: “In our view, gross margin should partially recover in coming quarter, on back of price hikes taken, reduction in consumer and trade promotions, improved contribution from high-margin HFD (health food drinks) portfolio and increased footfalls in modern trade outlets once fears relating to Covid-19 subsides as it is critical for high margin premium detergent portfolio and personal care portfolio.”