HUL Q2: Price hikes, volume growth likely to boost earnings

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HUL Q2: Price hikes, volume growth likely to boost earnings

FMCG companies in India have been battling high cost of raw materials for several quarters. Hindustan Unilever raised prices across several product categories over the last few months to offset some of the cost pressures and shore up margins.

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FMCG companies in India have been battling high cost of raw materials for several quarters. Hindustan Unilever raised prices across several product categories over the last few months to offset some of the cost pressures and shore up margins.

These price hikes coupled with good volume growth is expected to help the FMCG giant post double-digit earnings growth in the second quarter.

Analysts expect overall revenue could grow 12-14% in July-September, with a volume growth of 7-8% year-on-year and price hikes.

"HUL is likely to continue its healthy volume growth trajectory. Soaps and detergents segment growth is expected to be at 12% and personal products are likely to continue its healthy growth of 19% during this quarter," said brokerage house Emkay Global Financial Services.

However, profit growth will be slower at around 10% as raw material costs will weigh. CLSA Asia Pacific Markets expects higher taxes and lower margins will moderate net earnings growth to just 5%.

Among key input costs, LLP (light liquid paraffin), LAB (linear alkyl benzene), PFAD (palm fatty acid distillate) and Copra have seen prices increase sharply, prompting many FMCG companies to raise product prices. HUL has raised price of Rin detergent, Clear shampoo and Pears soap among others in its FMCG basket.

"We expect sequential increase in soaps and detergent margins due to benefits from price increases and cost control," said Motilal Oswal analysts Amnish Aggarwal and Harit Kapoor.

Price of several raw materials has started cooling or their rise at least has slowed now but it still remains high compared to a year ago. So while gross margins are expected to go up 230 basis points over the April-June quarter, year-on-year margins will decline by 280 basis points, Aggarwal and Kapoor said.

Emkay expects HUL's EBITDA margins will be flat year-on-year at 13.6% as high raw material costs will be offset by better operating cost efficiencies.

 Angel Broking too expects a cut in advertising spends, apart from price hikes, will offset the margin pressures for HUL in the second quarter.

Price of raw tea and coffee has also been on the up in the past several months. This will also put pressure on margins in HUL's beverage business, where it launched the Bru Exotica coffee in the premium segment during the quarter.

HUL shares have outperformed its peers and the broader market in the last three months. While the stock is up over 8%, the CNX FMCG index is only up 1.5%, while the wider CNX Nifty index is down 2.2%. But many analysts still remain "neutral" on the stock.

Angel Broking and Motilal Oswal have a "neutral" rating on HUL, while Sharekhan rates it "hold." Emkay has a "accumulate" rating on the stock, and B&K rates it "underperform."

HUL shares closed up 2.3% at Rs 351.05 on Friday.

Nachiket Kelkar
nachiket.kelkar@network18online.com