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.
VOLUME growth, though modest, has been driven by the FMCG major’s home care business
THE beauty & personal care, and foods & refreshment segments have remained stagnant
edanta Ltd has taken a final charge on its books on account of its shut Sterlite Copper plant and is exploring options to utilize the plant’s assets at its other locations after the Supreme Court dismissed the company’s special leave petition (SLP) to reopen the unit.
While the company plans to file a review petition before the apex court, it has taken an impairment of ₹746 crore on its books during the January-March quarter. The residual value of the plant on its books is what can be “conservatively” realized through the sale of the assets, a top executive at the company said.
“We are exploring legal options. At the same time, we are at the drawing board to look at how the asset can be utilized at the rest of our facilities,” Arun Misra, executive director of Vedanta Ltd, told Mint on Thursday.
The equipment at the Thoothukudibased plant, like sulphuric acid plant, phosphoric acid plant, among other things, can be utilized at Vedanta’s numerous other manufacturing locations, Misra said.
“It’s not very difficult to relocate the facilities and make the best use of it. We will first look at the legal options. If all roads are closed, we will of course use the asset wherever it adds the best value to our current business,” he said.
The plant has been shut since 2018 after Vedanta’s application for renewal of Consent to Operate (CTO) for the plant was rejected by the Tamil Nadu Pollution Control Board in April that year. Since then, the company has moved the National Green
2018 year when the Sterlite Copper plant was shut
Tribunal, the Madras High Court and the Supreme Court and even made a failed attempt at selling the plant, but to no avail. Meanwhile, the company is awaiting CTO for its ESL Steel plant that it has put on the block, according to Misra. The company has received “attractive” offers for the plant that it acquired for ₹5,320 crore through a bankruptcy resolution process six years ago, he added. The company should get the CTO during the ongoing quarter, post which it expects to close the transaction in due course. The mining and resources major reported a sharp dip in its profits for the March quarter compared to the previous year due to lower commodity prices, higher borrowing costs and some exceptional charges.
It reported a profit of ₹1,369 crore attributable to the owners of the company. This was a 27% year-on-year decline.
Lower prices of metals such as aluminium and zinc during the quarter meant that the company’s top line dipped 6% year-onyear to ₹34,937 crore.
Earnings before interest, tax, depreciation and amortisation (Ebitda) dipped by a similar magnitude to ₹8,196 crore. Ebitda margin remained almost steady at 23.5%, dipping just 6 basis points compared to corresponding period last year.
The company’s borrowing cost during the quarter was 34% higher at ₹2,415 crore, hurting its bottom line.
This, after net debt went up to ₹56,338 crore as of 31 March, from ₹45,260 crore a year ago.
On Vedanta’s proposed demerger into six separately-listed companies, Misra said that the process is expected to be concluded by December.
It expects to receive the green light from 75% of its lenders by the end of May, which is a key criterion for its to receive Sebi’s blessings for the demerger.