FMCG major Hindustan Unilever expects margins to remain under stress in the near term the volatile commodity prices and tepid rural demand, the company’s management indicated during a post-earnings briefing on Wednesday.
“We expect more inflation sequentially and will dynamically manage our business, we will continue to drive savings harder and take calibrated pricing actions while protecting and growing our consumer franchise. Our margins will decline in short term as the price versus cost gap increases” said Ritesh Tiwari, CFO, HUL.
According to the company it witnessed over 60 percent inflation in crude oil and palm oil, 20 percent inflation in plastics, and 30 percent inflation in soda ash in the March quarter of FY22 as compared to the same period the previous year.
For the quarter ahead, too, the company expects the palm oil prices, a key commodity for products like soap bars, shampoos, and other personal care products, to remain volatile.
The company’s EBITDA margins, however, compressed by 20 basis points year-on-year on account of its cost-control measures. HUL’s overall gross margin was contracted by 331 basis points year-on-year (YoY) in Q4, while the homecare segment saw an EBIT margin contraction of 138 basis points YoY and beauty and personal by 129 basis points (YoY).
While its volume growth for the quarter also remained flat. The company had reported volume growth of 2 percent in Q3 and 4 percent in Q3.
FMCG companies have been grappling with unabated inflation across key commodities for several quarters now coupled with a tepid demand scenario, which makes it difficult to pass on the cost increase to the consumer. Most packaged consumer goods companies have been reporting a negative to flat volume growth led by trend.
Eye on monsoon
The company, however, expects the demand scenario to improve in the second half of the calendar year 2022. According to Sanjiv Mehta, CEO and MD, HUL's good Rabi harvest coupled with good rains and government spending augurs well for the rural economy and the demand scenario in the hinterlands of the country could improve in the second half.
A good Rabi harvest said Mehta, projection of a good monsoon coupled with capital expenditure of Rs 7.5 lakh crore by the government augurs well for the rural economy and might spur consumption in a sluggish rural economy.
“According to Nielsen data on the FMCG industry, in the last three months value growth is about 1 percent and volume growth is -0.8 percent,” said Mehta.
Mehta expects the inflationary scenario also to improve in the second half of the year with the easing of geopolitical tension. The company, however, expects the operating environment to remain challenging in the near term on account of inflationary pressure.
HUL, indicated, that it might look at further price hikes to mitigate the impact of inflation. The company had taken price hikes of 10 percent across the category during the last quarter.
“The commodity prices in the quarters ahead will go up even more and we will take some price hikes going ahead,” shared Mehta.
HUL has become the first company to clock a turnover of Rs 50,000 crore in a fiscal. It had reported a turnover of Rs 45,996 crore for FY21 and saw an 11 percent jump to Rs Rs 51,193 crore in FY22.
Its profit for the entire financial year 2022 jumped about 11 percent to Rs 8,818 crore from Rs 7,954 crore in the previous financial year.
“In challenging circumstances, we have grown competitively and protected our business model by maintaining margins in a healthy range. I am pleased that we have become a Rs 50,000 crore turnover company in this fiscal," Mehta said.The FMCG major beat analyst estimates to report a standalone profit of Rs 2,327 crore for the fourth quarter ended March 2022 as opposed to Rs 2,143 crore last year. The company’s revenue from operations stood at Rs 13,462 crore, up 11 percent as compared to Rs 12,132 crore in the fourth quarter of last year. The company reported an EBITDA margin of 24.6 percent during the quarter as compared to 24.4 percent in the same period last year.