Rural slowdown bottoming out, gradual recovery in volume expected: HUL

The rural slowdown is "bottoming out" and a gradual recovery in volume is expected, helped by government initiatives to drive the economy there along with moderation of inflation, FMCG firm HUL's CFO Ritesh Tiwari said on Thursday.

Though the rural growth was still down 3 per cent in the quarter ended March 31, 2023, it is on the right path of recovery with overall commodities price moderation, Tiwari said in an earnings call.

"Everything is going in the right direction," he said, adding, with a good level of government expenditure to drive the rural economy, moderation of inflation and 6 to 6.4 per cent growth of country's GDP.

 

While talking about the overall FMCG (fast moving consumer goods) market, Tiwari said, "the latest three-month market numbers are 11 per cent growth but volumes are flat. This is a better sign for the industry."

Even if the volume is flat, he said, it is better "compared to what we had last year, about 4 per cent negative volumes in the previous quarter. So overall the FMCG industry per se is looking better because inflation is moderating and of course, the price growth in the market always adjust with a lag".

Moreover, moderating inflation would also help HUL to improve gross margin, which will help generate more fuel for spending and investments in advertising and sales promotion, he said, adding, "these are necessary investments for the business".

"So overall we do believe that the rural slowdown is bottoming out and the sequential dropping declined from double-digit at one point in time to high-single-digit, and is now 3 per cent. It is on the right path and with overall commodities moderating, the price valuation to overall start rebalancing," he said.

However, he also added that it would depend on the intensity of monsoons, which will ultimately take the rural income forward in the coming months.

While talking about the level of inflation, Tiwari said, "Cumulatively in the last two years, we have seen 30 per cent inflation at the total level at HUL. For that, we have done 18 per cent price increase. We have covered 60 per cent inflation through a price increase."

This price increase was done on smaller chunks, hence there was a decline on gross margins year on year.

HUL will continue to focus on supply chain costs and material costs to drive the gross margin.

"As we improve gross margin, with commodities moderating and sequentially further moderating we will be able to drive better gross margin to our commodity cost outlook," he said, adding, the savings in the P&L account, which will help "generate fuel for putting behind advertising and sales promotion".

The rural market, which normally contributes around 35 per cent of FMCG sales, was down because of the unprecedented inflation that impacted multiple categories. This increase has impacted the consumers in rural markets as their disposable income is small in comparison to the urban market.

HUL has 30 per cent portfolio, which sells at price point pack, and the volume has impacted there.

When asked about the price cuts, he said for the tea segment, the job of price reduction is done.

"Other two categories, which are also seen in moderation in commodities are skin cleansing, soaps and laundry. In both of these categories also we have taken sequential pricing action," said Tiwary, adding that this pricing actions have been done in both routes -- either by decreasing the price or increasing the amount of fill levels in products.

Maintaining a competitive price value equation for consumer becomes extremely mission-critical for HUL to drive competitive volume growth, he added.

However, he also added the Health Food Drinks (HFD) business is still facing inflation..

"The only place where we are seeing inflation impacting the business at this point of time is HFD. Malt, barley, and sugar, these soft commodities have seen inflation. That is the only portion of the portfolio which has seen a significant amount of inflation compared to the overall rest of the business," he said.