HUL versus ITC: Despite headwinds, stable demand aids growth in Q2

Despite headwinds, the firms posted strong Q2 numbers in their FMCG businesses

Hindustan Unilever (HUL) and ITC, two bellwethers within the fast-moving consumer goods (FMCG) industry, posted strong revenue growth in the July-September period, led by a recovery in consumer demand, especially in rural areas. At 11.1 per cent (HUL) and 12.7 per cent (ITC) revenue growth for the quarter, the companies gained from an uptick in sentiment in most categories where they operate in. 

HUL has a footprint across home and personal care products and food and beverages, while ITC has a presence in food and beverages, personal care, lifestyle, retail and stationary items, bunched under the category of FMCG-others by the company.

In the second quarter, FMCG-others gave ITC a revenue of Rs 31 billion and earnings before interest and tax (Ebit) of Rs 0.5 billion. ITC derives 28-30 per cent of its revenue from FMCG-others. In the past few years, this segment has emerged a key growth driver for the firm, pushing the management to invest significantly behind this vertical. In the second quarter, along with hotels and agri-business, FMCG-others posted double-digit revenue growth, analysts said.

Profit contribution of FMCG-others though remains small. Around 85 per cent of ITC’s profits come from its cigarettes business, with revenue contribution at 45-48 per cent. But, as regulatory challenges, including higher incidence of tax remains, it is the FMCG-others segment that the management is increasingly counting on to derisk its business model, experts said.

HUL, in contrast, reported a revenue of Rs 92.34 billion for the second quarter, while net sales, which excludes other operational income (this is included in revenue numbers) was Rs 91.4 billion, a growth of 11.5 per cent over the year-ago period. Net profit for HUL came in at Rs 15.25 billion, up 19.5 per cent year-on-year, sector analysts said. 

As Sanjiv Mehta, chairman and managing director, HUL, said, “Growth (across segments) has been broad-based and in double digits, led by an uptick in sentiment and proactiveness we displayed in cutting prices. Some of that has reflected in our Q2 results.”

At 10 per cent volume growth for the September quarter, HUL continued with its strong momentum on that front. The 10 per cent number was also the firm’s fourth straight quarter of double-digit volume growth. In Q2, HUL undertook price hikes of only 2-3 per cent in select categories and is expected to keep that approach in the coming quarters despite currency headwinds. Mehta had said at the time of Q2 results that the firm would have a judicious approach to price hikes and would consider all factors before going in for an increase. 

Analysts are interpreting this as the management’s decision to stick to volume growth rather than price-led growth. Price hikes, however, some experts said were expected to be higher than the 2-3 per cent seen in the second quarter as HUL attempts to protect margins amid growing volatility. “Sharper hikes will be there in the forthcoming quarters though HUL will seek to maintain sanity,” Sachin Bobade, senior research analyst, Dolat Capital, said.

In ITC’s case, revenue growth in Q2 was led by staples, snacks, meals and biscuits in packaged foods, fragrance, liquid handwash, and bodywash in personal care and notebooks in education and stationary. 

“Growth was partly offset by restructuring of the company’s retail footprint and trade presence in its lifestyle retail business,” Abneesh Roy, senior vice-president, research, institutional equities, Edelweiss, said. “But with a stable demand environment and signs of recovery, ITC is poised for growth in its overall FMCG (others) business,” he said.