THE COMPASS HUL’S Q4 report a red flag for FMCG investors

Lower input costs, GSK merger could bring some comfort in FY21

India Inc, including the pricey fast-moving consumer goods (FMCG) players were expected to bear the brunt of the Covidled disruption.

However, Hindustan Unilever’s (HUL’S) worse-thanexpected March quarter (Q4) numbers indicate that investors will have to lower expectations further, with further pressure likely ahead.

Domestic volumes shrunk by 7 per cent year-on-year (YOY) — among the worst-ever performances by the FMCG major — lower than the Street’s expectations of a 4 per cent decline. This took a toll on HUL’S overall Q4 numbers.

Top line fell 9.4 per cent YOY to ~8,885 crore, suggesting that average realisation contracted by over 2 per cent YOY — also a first in many quarters. Consequently, profit before tax (PBT) was down 10.8 per cent YOY to ~2,050 crore. The top line and PBT numbers were a big miss, given the Bloomberg consensus estimates of ~10,117 crore and ~2,398 crore, respectively.

Similarly, earnings before interest, tax, depreciation, and amortisation fell 11 per cent YOY to ~2,065 crore — 20 per cent below expectations. This was for the first time since the

December 2015 quarter that HUL reported a YOY drop in operating profit.

Shirish Pardeshi, analyst at Centrum Broking, says: “Worse-than-expected numbers in Q4 indicate more pressure for the entire FMCG segment over the next couple of quarters.” While HUL’S nonessential segment was expected to face pressure because of the outbreak, the essentials portfolio wasn’t spared either. Some disappointment could be attributed to the fact that the Covid-led pressure on sales emerged from mid-march and not March 23. In an analyst call, the management said demand pressure had been building up since the start of 2020.

All business segments — home care, beauty and personal care, and food — posted 4-14 per cent YOY decline in revenues, due to disruption at the distributors’ end and low inventory. Pardeshi also said that while Covid-19 was a major reason, competitive intensity in the essentials categories was a key factor, too.

Besides supply disruption, changing buying behaviour of customers is another concern — not only for HUL but the FMCG sector as a whole. How firms realign their strategies regarding product launches, cost savings, and distribution will be crucial. HUL is operating at 70-80 per cent of its capacity. The merger with GSK Consumer, along with lower input costs, should provide some support to HUL’S earnings in FY21.

Analysts expect the stock to correct on Monday, given its rich valuation of 66x its FY21 estimated earnings — 19 per cent higher than its 5year mean.