HUL recovery path to be gradual
Hindustan Unilever Ltd (HUL) is asking for more patience from its investors as the fast-moving consumer (FMCG) company grapples with persistent sluggish volume growth. The trend, a cause of concern for the past few quarters, persisted into the March quarter (Q4FY24), with underlying volume growth at mere 2%, same as the previous two quarters, after a slightly better, but hardly impressive, 3% increase seen in Q1.
Growth was primarily driven by the home care business witnessing mid-single digit growth, while beauty & personal care (BPC), and foods & refreshment segments remained stagnant.
Competition from smaller players continued to be a drag. While its premium portfolio is doing relatively better, it’s not enough considering the 1% year-on-year fall in Q4 Ebitda (earnings before interest, taxes, depreciation and amortization) to ₹3,435 crore. According to the investor presentation, its market share metric has worsened sequentially, with less than 60% of the company’s businesses now gaining share.
For the second consecutive quarter, HUL’s pricing or realization was lower year-on-year in Q4 on the back of price cuts. Consequently, operating revenue for Q4 remained flat at ₹14,857 crore. The biggest let-down was the 2.7% dip in BPC revenue to ₹5,050 crore, exacerbated by an astonishing 10% drop in per$5.6 sonal care revenue. What gives?
The skin cleansing portfolio suffered due to price cuts and dip in volumes in the mass and popular segments. Here, HUL is taking steps to correct pricevalue equation for mass and popular segments. The home care business was also adversely impacted by price cuts, achieving only 1.4% revenue growth. Food and refreshment revenue grew by 3%, helped by pricing.Improvement in gross margin has been a bright spot. In Q4, gross margin rose by 316 basis points year-on-year to 51.9%. However, Ebitda margin fell by 19 basis points to 23.1% due to higher advertising expenses and staff costs. For FY24, margin trends are similar, with a significant expansion in gross margin and far lower rise in Ebitda margin. Its management expects Ebitda margin to maintain current levels for the near term. HUL’s volume growth recovery appears challenging. “With expectations of gradual recovery in volume growth trajectory and pricing growth likely to remain low (marginally negative in H1FY25 and in low-single digit in H2 if raw material prices remain unchanged), outlook for FY25 revenue growth in underwhelming,” said an ICICI Securities report dated 25 April.
However, the brokerage said that in case if raw material prices trend higher driven by increased geopolitical concerns, HUL is likely to be a beneficiary on the back of price-led growth and reduced competitive intensity. Much depends on how the monsoon pans out this year, and improving macro-economic indicators.
Amid subdued demand conditions, analysts trimmed their earnings estimates for FY25 and FY26. Investors, too, seem to have adjusted their expectations. So far in 2024, HUL shares fell 16%, underperforming the sectoral Nifty FMCG index, which dropped by 5%.
“HUL has seen de-rating since August 2022, with the current forward price-toearnings (P/E) multiple at 46x (on consensus), which is about 15% and 5% below its 5-year and 10-year historical average forward P/E, respectively,” Emkay Global Financial Services said in a report on 25 April. According to the Emkay analysts, a re-rating in the stock requires better execution. While valuations have tapered, any significant improvement is expected to be gradual, limiting substantial gains. Thus, while HUL’s investors have little reason for alarm, there is also no cause for celebration.