Packaged consumer goods maker Hindustan Unilever Ltd (HUL) said that the second wave of the COVID-19 pandemic won’t hurt the company and the overall FMCG market as much as it did a year ago thanks to rural growth holding up and better preparedness on part of companies.
“The rural growth has still held on and in the first two weeks of April we have seen the same momentum as we had witnessed in the March quarter,” said Sanjiv Mehta, Chairman and Managing Director of HUL, in a press conference after announcing the results for the quarter ended March. In the fourth quarter of FY21, HUL reported consolidated net profit growth of 44.8 percent from a year ago.
Rural growth was strong throughout the last fiscal year as initially the virus spread was mostly in large cities. Despite the farmer protests, India is eyeing a record Rabi wheat output of 108 million tonnes, Reuters reported on Thursday. Still, there are some concerns that the pandemic spreading to rural India could derail growth.
According to Mehta, while there has been some turbulence in the market in the last two weeks, it is nowhere close to the disruption the FMCG industry saw last year after the government had announced a nationwide lockdown to check the spread of the pandemic.
“Though there might be some impact on demand due to the mobility issues, our factories are running and the supply chain is still operating. At this stage, I firmly believe that it is not going to be as bad as what happened in the June quarter of the last year,” Mehta added.
FMCG companies were riddled with supply-chain challenges last year after the lockdown on the back of the exodus of migrant population and the delay in regulatory clearances to operate their manufacturing units. Their supplies had run dry as consumers scrambled to hoard products after the sudden lockdown announcement.
According to market research firm Nielsen, FMCG reported a 19 percent contraction in the April-June 2020 quarter. However, as the situation improved eventually, the segment recovered to grow 0.9 percent and 7 percent in the next two quarters.
Strong earnings
The surge in growth continued in the January-March quarter as seen from HUL’s performance. It reported volume growth of 16 percent over a year ago during this period.
The domestic consumer business grew 21 percent year-on-year (excluding the impact of the merger of GSK Consumer Healthcare and acquisition of 'VWash').
Consequently, HUL reported a revenue growth of 35 percent to Rs 12,433 crore. Consolidated net profit rose 44.8 percent from a year ago to Rs 2190 crore.
Growth was broad-based. All major verticals – health, hygiene and nutrition – grew in double digits for a third quarter in a row, while discretionary and out-of-home categories improved sequentially, said Abneesh Roy, Executive Vice President for Institutional Equities at Edelweiss Securities.
What gives credence to Mehta’s assertion is that 80 percent of HUL’s products are in the health, hygiene, and nutrition categories. These are listed as ‘essentials’ by most states and therefore expected to be minimally impacted by the lockdowns.
“HUL's categories represent need-based consumption and these have not been impacted due to the lockdown as the states have not imposed any restrictions on the movement or sale of these categories,” said Ankur Bisen, senior vice president of retail and consumer products, Technopak.
“Going ahead it is expected that these products will not face disruption due to the lockdown,” he added.
Future preparedness
Several state governments including Delhi, Maharashtra, Karnataka, and Chhattisgarh have imposed lockdowns to contain the rapid spread of the Covid-19 pandemic. As the restrictions are not nationwide and localised in nature, several logistics companies are facing it challenging to deliver goods. On the other hand, companies are also facing labour and manpower shortage due to their employees falling sick.
Mehta said this was not a concern at the moment.
“We have built capacity for the long term and even if there is a fluctuation in demand, we are going to pull it back,” he said.
In a presentation to investors, the company said that its capacity is now 1.3 times that of pre-COVID levels and it has adopted different models such as giving liquidity support to distributors to ensure continuity of supplies.
According to Mehta, the company’s efforts such as Project Shakti, and its B2B app Shikhar will also help them tide over difficult times, if any, ahead. Under its Shakti Project, HUL claims it has created a rural distribution network of 136,000 women micro-entrepreneurs.
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