Hindustan Unilever’s fourth-quarter financial results fell short of expectations, even addition of premium products pushed revenue growth during the quarter. Margins shrank and net profit fell more than expected, as volume growth slowed down on lower demand and rising competition.
Brokerages slashed the target prices on the Hindustan Unilever stock as the outlook for the FMCG giant remained uncertain and growth prospects remained lacklustre.
The Surf Excel-maker reported 6 percent on-year fall in standalone net profit at Rs 2,406 crore in the fiscal fourth quarter. Hindustan Unilever's sales rose only marginally to Rs 14,693 crore in the fourth quarter.
Analysts projected a profit of Rs 2,435 crore on a revenue of Rs 14,913 crore, according to the average of nine brokerage estimates.
Volume growth disappoints
The consumer goods company’s sales volume grew only 2 percent, short of the Street forecast of 3 percent. The growth was led by mid-single-digit growth in homecare, while beauty and personal care (BPC) and foods and refreshments (F&R) clocked flat volume.
Also Read | HUL’s personal care business sees 10% drop in sales in Q4
The overall beauty and personal care business contributed 35 percent of the FMCG major’s overall revenue for the March quarter with sales of Rs 5,050 crore. While the personal care segment saw a decline in sales, the beauty segment saw a 4 percent growth, the company said.
HUL has gained penetration in around 75 percent of its portfolio, with three quarters of the firm’s offerings gaining or maintaining the market share.
The current thrust on premiumisation, which has a 25 percent contribution to the business, is largely focused on the laundry and shampoo segments. The premium portfolio saw growth across all categories, but its mass portfolio was weak.
Motilal Oswal said it expects a gradual recovery in volume growth in FY25. The growth will be driven by own initiatives and gradual improvement in demand.
“The impact of price cuts will persist in 1HFY25, but the volume print should improve during this phase and the full revenue recovery will be visible in 2HFY25,” said the brokerage.
The firm’s management said that it was hopeful of a gradual recovery in the rural markets, which is dependent on the improvement in monsoon scenario. Additionally, measures such as price cuts should lead to better growth in the mass segments.
Food & refreshment impresses, soaps lose foam
In food and refreshments (F&R), the functional nutrition drinks saw high single-digit growth, as a result of increased penetration and market share gains. Soup and food solutions buoyed the foods growth, while ice cream reported double-digit volume-led growth. Coffee grew in double-digits led by pricing.
International brokerage Goldman Sachs said the deterioration in the soaps business is concerning, as its weak performance continued. The recovery in the soap segment could take a few quarters. The fall in the soap business led to the miss in the beauty and personal care segment.
EBITDA margin impacted
Hindustan Unilever’s spending on advertisements and promotions (A&P) saw a 23 percent on-year rise. In terms of spending as a portion of revenue, it was 10.8 percent, which is higher by 200 basis points (bps) on-year.
Also Read | Hindustan Unilever eyes modest margin improvement on better product mix
The EBITDA margin contracted around 20 basis points on-year to 23.1 percent, since there was an impact of 60 bps from the termination of the GSK consignment sales.
Hindustan Unilever and GSK Consumer decided to terminate their distribution agreement in 2022. From November 2023, HUL stopped selling GSK Consumer products such as Sensodyne, Crocin, Otrivin and Eno brands in India.
The raw material pricing in key categories remained benign, and JM Financial noted that the company will realign its focus to improve the mix and reduce production costs to further grow the gross margin.
Should you buy, sell or hold HUL stock?
HSBC raised alarms regarding HUL’s outlook, as the rise in unorganised, regional competition and poor rural demand showed poor growth prospects. The international brokerage maintained its ‘hold’ call, with a target price of Rs 2,300 per share.
“With negatives largely known, the stock’s very low return over the last three years and valuation below historical average could likely provide some support on the downside. Given the tough operating landscape, rerating will be contingent on better visibility on volume acceleration and double-digit earnings growth,” JM Financial said.
The domestic brokerage had a share price target of Rs 2,640 on the counter, with a ‘buy’ call.
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