Hindustan Unilever slips 5% in two days post September quarter earnings

The company's cost savings programme and tweaking of marketing spends would help it maintain higher operating margins, analysts said

Shares of Hindustan Unilever (HUL) dipped 2 per cent to Rs 2,530.90 on the BSE in Tuesday's intra-day trade, falling 5 per cent in the past two trading days, after the company registered a 22.2 per cent year-on-year (YoY) increase in net profit in the July-September quarter (Q2FY23), beating Street expectations despite sustained weakness in rural markets.

However, the company’s earnings before interest, taxes, depreciation, and amortization (Ebitda margin contracted 180 bps to 23.3 per cent from 25.0 per cent in the year-ago quarter.

The fast moving consumer goods (FMCG) company registered a volume growth of 4 per cent during the quarter. While the net profit rose to Rs 2,665 crore from Rs 2,181 crore in the year-ago period, revenue increased 16.1 per cent to Rs 15,144 crore, as against Rs 13,046 crore reported last year.

In the past one month, HUL has underperformed the market by falling 5 per cent, as compared to 3 per cent rise in the S&P BSE Sensex. However, in the past six months, the stock has rallied 21 per cent as against 6 per cent gain in the benchmark index.

HUL took price cuts in October 2022 mainly to pass on the benefit of dip in palm oil prices. However, other commodities like crude, soda ash, milk and barley still remain elevated. Moreover, currency depreciation has accentuated margin pressure. Though gross margins are likely to improve sequentially, it would still be lower YoY in the next few quarters, ICICI Securities said in a note.

However, the company’s cost savings programme and tweaking of marketing spends would help it maintain higher operating margins. Thus, the brokerage firm believes volume growth would be the single biggest important factor in coming quarters. Though rural income levels and festive season demand are showing favourable signs for volume growth, long term sustainable volumes would define future performance.

"We believe similar to palm oil decline, other commodities would also cool off in the next few quarters, which would eventually help the company to increase advertisement & promotions activity for volume growth. We remain positive on growth prospects as well as margin expansion possibility in the long run," the brokerage firms said in a result note.

"HUL's pre-Covid earnings had been extremely strong. It reported around 18 per cent EPS CAGR in the four years ended FY20, before steeper commodity cost inflation (v/s peers) and the over-indexed discretionary portfolio adversely impacted its earnings in FY21 and FY22. HUL's pre-pandemic earnings growth was particularly impressive, given the weak mid-single-digit growth posted by its (much smaller) staples peers over the same period. Once the ongoing high material cost environment abates, we believe HUL could revert to mid-teens earnings growth,
"Motilal Oswal Financial Services said in result update.