HUL’s Q2 volume growth falls short of expectations, disappointing investors

Hindustan Unilever Ltd’s (HUL) September quarter results (Q2FY22) weren’t encouraging for investors, which is evident from the more than 3 percent drop in its share price on the National Stock Exchange (NSE) after the numbers were announced on October 19.

One of the key disappointing factors has been volume performance. HUL’s underlying volume growth (UVG) in Q2 stood at 4 percent, below estimates. For instance, JM Financial Institutional Securities Ltd and Kotak Institutional Equities pegged volume growth at 8 percent and 5 percent, respectively.

Recall that there were restrictions in the June quarter (Q1FY22) owing to the second COVID wave, which hit performance. With the gradual easing of restrictions, the demand recovery was supposed to gather pace smartly. Moreover, it is not as if it was off a strong base, what with volume growth at just 1 percent in Q2FY21.

Further, commentary on margins isn’t particularly encouraging. In its investor presentation, HUL said, “Gross margin (is) likely to remain under pressure.” It added, “Judicious pricing actions coupled with cost agility and savings programmes to continue.”

Investors should note rising palm oil, crude oil and tea prices have been a pressing concern for HUL. In Q2, gross margin (GM) contracted 142 basis points (bps) year-on-year to 51.6 percent. One basis point is one-hundredth of a percentage point. However, the company was able to curtail the drop in earnings before interest, tax, depreciation and amortisation (Ebitda) margin to 46bps year-on-year. Accordingly, the Ebitda margin for Q2 stood at 24.6 percent. A relatively slower pace of increase in employee costs and other expenses helped restrict the Ebitda margin contraction.

In a first-cut note, Dolat Capital Market Pvt. Ltd said, “Apart from commodity inflation, delayed and partial price pass on would have resulted in GM and Ebitda margin contraction during the quarter.”

Coming to the different businesses, home care, which contributed around 30 percent of HUL’s revenues, saw almost 16 percent year-on-year growth. Here, the fabric wash segment saw high double-digit growth led by a strong performance in the premium portfolio. The company said calibrated price increases were taken across fabric wash and household care portfolios to partly offset the high inflation in input costs.

Further, the beauty and personal care business, which contributed around 39 percent of revenues, grew by 10 percent year-on-year driven by skincare, colour cosmetics and haircare. Within the skin cleansing segment, hand hygiene declined on an exceptionally high base. On the other hand, the skincare segment saw high double-digit growth owing to improved mobility.

HUL derived most of the remaining revenues from its foods and refreshments business, which saw a tad underwhelming 7 percent growth.

HUL’s overall revenues increased by 11 percent in Q2. Moving ahead, some analysts expect revenue growth to start reflecting higher pricing growth in the second half of fiscal 2022. Having said that, there has been some rural slowdown in recent months and investors should keep an eye on whether this continues. As such, the lack of meaningful triggers may keep sentiments subdued for the HUL stock.