HUL's Tiwari says rural demand to outpace FMCG industry average

Our capital allocation approach prioritizes high dividend payouts, ensuring returns to shareholders: HUL CFO

Hindustan Unilever Ltd Chief Financial Officer Ritesh Tiwari struck an optimistic chord on rural consumption, projecting high single-digit volume growth rates. Tiwari cited expectations of a favourable monsoon coupled with an improving macroeconomic environment as factors that would spur rural demand to outpace the industry average.

In an interview, Tiwari said the company’s near-term focus is on driving volume growth, enhancing gross margins, and maintaining Ebitda margins. Tiwari spoke about how the company is leveraging its premium products to drive growth, while also looking to deepen its market share in large product categories.

He also touched upon HUL’s capital allocation strategy and its focus on prioritising high dividend payout for its shareholders. Edited excerpts:

Q: Can you provide an overview of the latest Q4 results and the strategy moving forward?

A: Our strategy moving forward revolves around prioritising volume growth amid the current landscape. Given the current state of commodities, we anticipate minimal price growth in the coming quarters. Our approach, therefore, involves three key priorities: first, driving volume growth; second, enhancing gross margins to fuel further investment; and third, ensuring competitiveness in the market by expanding market share.

Q: Can you outline your capital allocation strategy, considering your surplus and dividend commitments?

A: Absolutely. Our capital allocation strategy encompasses three key areas. Firstly, we prioritise funding growth within our business. This means investing in initiatives that enhance our capabilities such as market research and digital advancements. For instance, we've recently allocated funds from a 350 basis points gross margin improvement towards business investments.

Secondly, we believe in rewarding our shareholders through high dividends, reflecting our low capital intensity. We consistently maintain a dividend payout ratio of over 90 percent, with recent growth of 8 percent year-on-year in dividends.

Thirdly, we actively explore bolt-on acquisition opportunities to expand our portfolio where there are gaps. Whether through brand extensions, bringing in brands from Unilever's portfolio, launching our own brands, or pursuing acquisitions like our majority stake in OZiva and minority stake in Wellbeing Nutrition. This approach ensures we're continually building our portfolio for the future.

Q: The stock performance seems to have plateaued despite promising business prospects. What do you attribute this stagnation to?

A: When assessing stock performance, it's essential to consider several fundamental principles that guide investor sentiment. Firstly, consistent growth is paramount. Investors value companies that demonstrate sustained growth over time. Secondly, competitiveness plays a significant role. Growing ahead of the market indicates strength and resilience. As for margins, while our current focus is on top line growth, we aim to maintain it at the current range of 23 to 24 percent in the near term whilst making modest improvements in mid-long term.

In terms of our recent performance, we've consistently added substantial turnover to our top line, showcasing the scale benefits of our wide-ranging portfolio spanning multiple FMCG categories. Despite challenges in certain quarters, such as the impact of external market dynamics, we've remained steadfast in our commitment to growth and profitability.

Furthermore, our continuous focus on capital discipline and competitiveness in the market has been appreciated. Our diverse portfolio, coupled with our talented workforce and thought leadership, positions us strongly for the future. We've always been at the forefront of innovation, whether it's introducing new product formats or pioneering business models like our B2B initiatives with retailers.

Q: Has the idea of a share buyback crossed your mind as part of the capital allocation strategy?

A: The board continually assesses various options, including share buybacks. With a strong cash position, we maintain a robust financial standing. Our capital allocation approach prioritises high dividend payouts, ensuring returns to our shareholders. Additionally, we remain open to strategic acquisitions that align with our business objectives. When evaluating the potential for share buybacks, we consider factors such as market conditions, shareholder value, and available cash reserves. Ultimately, our decisions are guided by maximising long-term value for our shareholders while maintaining financial prudence and flexibility.

Q: When you talk about volume growth, do you see overall demand growth complementing that or will it be through winning more market share?

A: It will include both. When analysing our latest quarter results, we see distinct trends across our portfolio. Approximately half of our portfolio is experiencing growth in mid to high single-digit volumes, which is promising. However, a quarter of our portfolio is holding steady in terms of volumes, while another quarter is seeing a decline.

Our coffee segment has been affected by significant inflation in commodity prices, resulting in decreased volumes. Similarly, our skin cleansing segment has faced challenges due to pricing competitiveness, though we're addressing these issues. Additionally, our tea segment has been grappling with the market downgrading to loose tea due to widening price gaps between premium and lower-tier teas.

Moving forward, our strategy is focused on agility and responsiveness to consumer behaviour and market dynamics. Rather than wait for macroeconomic shifts, we're aligning our investments with areas of growth and consumer demand. For instance, our premium beauty business is experiencing double-digit growth, while high-priority segments such as face cleansers, serums, and skincare are showing promising growth trajectories. We're also leveraging the e-commerce channel, which is witnessing robust growth rates, particularly in urban areas.

Our approach entails doubling down on investments in these growth areas while remaining attentive to broader economic indicators such as GDP growth and monsoon forecasts. We anticipate that with continued investment and market recovery, particularly in the second half of the financial year, we'll see improvements in overall market conditions.

Q: How do you plan to drive volume growth in the near to medium term?

A: Firstly, we're committed to market development initiatives to expand the reach and consumption of existing large categories. For instance, in highly penetrated categories like soap bars and laundry, there's significant untapped potential to drive further growth by venturing into incremental premium consumer segments and other need spaces. By focusing on market development, we aim to create more users and drive consumption, particularly in premium segments.

Secondly, we're prioritising the expansion of our premium portfolio. Currently, approximately one-third of our business sits in the premium segment, which is experiencing above-average growth. We're doubling down on this segment by investing in innovation and marketing to further drive growth.

Additionally, we're continuously seeding growth in emerging formats and demand spaces. In the beauty sector, we're witnessing disproportionate growth in segments like skincare and haircare. Despite competition from challenger brands, we remain confident in our market-leading positions and focus on expanding our portfolio to capture market value. By extending our existing brands into new spaces and launching new brands where needed, we're poised to capitalise on the under-penetrated market and drive growth.

Q: What growth rates do you anticipate for rural markets in the near future, and how do you expect this growth to unfold?

A: When considering rural growth rates, it's important to contextualise the numbers. Currently, we're observing headline growth rates in the double digits, around 12 percent. However, this growth is measured against a base of a declining market from the same period last year. Looking at a two-year compound annual growth rate (CAGR), we're beginning to see rural growth rates trending moderately positive, indicating a recovery from the previous decline.

I anticipate that rural markets will continue to strengthen, with high single-digit growth rates in volumes becoming more prevalent. This recovery is significant as it signifies a transition from a declining base to a growing one. With factors like improved monsoon patterns and favourable macroeconomic conditions, I foresee rural growth rates outpacing average FMCG growth rates in the coming years. As rural areas have historically been critical drivers of demand, this upward trajectory is promising for the overall FMCG sector.

Q: Looking ahead to the next three to four years, do you see growth primarily originating from your premium portfolio?

A: Firstly, we expect continued growth through market development initiatives in existing large categories. Categories like soap bars and liquid soaps have the potential to drive further growth. Similarly, products like Horlicks cater to the prevalent dietary patterns in India, offering functional nutrition solutions to address micronutrient deficiencies. By focusing on improving market penetration and consumption in such categories, we anticipate sustained growth.

Secondly, we see opportunities for growth in premium segments. As consumer spending trends evolve, particularly among urban consumers, there's a growing demand for premium products across various categories. By expanding our portfolio into premium spaces and catering to the evolving needs of consumers, we aim to capture this segment's growth potential. This includes areas like skincare, where multi-step routines are becoming increasingly popular among certain consumer segments.

Additionally, macroeconomic factors such as improvements in Indian GDP and overall consumption patterns are expected to contribute to growth. As the macroeconomic landscape strengthens, it creates a conducive environment for FMCG growth, providing further opportunities for expansion.

Q: How do you envision the evolution of your distribution channels?

A: The landscape of distribution channels in India is dynamic, with each channel playing a crucial role in reaching consumers effectively. Currently, general trade (GT) stands as the dominant channel, comprising around 60-70 percent of our business. We anticipate GT to maintain its prominence for the foreseeable future, with its significance likely to endure for the next few decades. Therefore, investing in GT and ensuring its future readiness is a key priority for us.

Additionally, we observe a growing share of sales coming from modern trade (MT) and e-commerce channels. Modern trade, represented by large-format, organised retail, contributes approximately 20 percent, while e-commerce accounts for 7 percent of our sales. While these channels are growing, we don't foresee GT diminishing rapidly. Instead, we expect it to be a gradual shift.

E-commerce, in particular, is witnessing significant segmentation and development. From traditional players like Amazon and Flipkart to emerging models such as quick commerce, the channel is diversifying rapidly. Quick commerce offers unparalleled convenience, allowing consumers to receive products within minutes.

Our approach to e-commerce encompasses both B2B and B2C models. B2B transactions involve supplying products to kirana stores through digital platforms, while B2C transactions cater directly to end-consumers. We've observed substantial growth in e-commerce sales in recent years, with the channel's share increasing from less than 5 percent to 7 percent.

While we anticipate further growth in e-commerce, we remain committed to nurturing our distribution network, especially GT. Distributors play a pivotal role in ensuring last-mile connectivity and will continue to be a cornerstone of our distribution strategy. As such, we're dedicated to investing in our distributor network to strengthen our presence across channels and adapt to evolving consumer preferences effectively.

Q: On the margins front, you spoke of maintaining the current EBITDA margins despite factors like the discontinuation of the GSK distribution business. How confident are you in sustaining these margin levels?

A: The decision to discontinue the GSK distribution business does have a 50-60 basis points impact on our margins. However, our strategy revolves around several initiatives to offset this impact and ensure margin stability.

Our primary approach is to enhance gross margins through improvements in our supply chain, raw material sourcing, and pricing strategies. Over the past year, we've seen a significant improvement in gross margins, reflecting our commitment to this strategy. Additionally, we operate with a healthy level of net profit margin, allowing us sufficient room for investment in various areas of the business.

One of our key programmes, Symphony, focuses on generating annual savings of 7-8 percent across all lines of our profit and loss statement. These savings are then reinvested into the business to drive innovation, enhance capabilities, and improve market positioning.

Q: Despite India's inflation being relatively moderate compared to other countries, your recent commentary suggests that consumers have felt its impact. Can you elaborate on this?

A: Absolutely. While India's inflation may not seem alarmingly high on a global scale, the cumulative effect over the last few years has significantly impacted consumers, particularly in the FMCG sector. Over the past three years, the cumulative inflation in the FMCG market equals that of the previous five years. This inflationary pressure has compelled the FMCG industry, including us, to adjust prices to account for rising costs of commodities like crude oil and palm oil, among others.

As a result, consumers have experienced a decrease in their disposable income, which has affected overall demand. While we're beginning to see signs of deflation, prices are still higher compared to previous years. This adjustment period has influenced our market growth, which, while promising in high single digits, is still below expectations, given India's low per capita consumption.

As GDP improves and consumer confidence strengthens, we anticipate a more robust market environment. With efforts to drive premiumisation and address issues of low consumption and penetration, we remain optimistic about the potential for accelerated growth in the FMCG sector, surpassing current high single-digit levels.