HUL Q4: Broad based growth pick up as the trade channel normalizes

HUL’s volume growth has been ahead of sector average for four out of last five quarters.

May 15, 2018 / 03:04 PM IST

Hindustan Unilever (HUL) reported strong numbers for the March quarter, helped by double digit volume growth at group level aided by  double digit value growth of sales across segments. Interestingly, HUL’s volume growth has beaten the industry average in four out of the last five quarters.

Stiff competition and higher raw material costs are the key near term challenges for the company. However, we feel, innovations, cost savings and distribution reach should help HUL overcome these hurdles.

Quarterly update: Comparable sales growth of 16% YoY

Source: Company

After factoring in GST related changes, HUL’s domestic sales rose 16 percent year-on-year, aided by a volume growth of 11 percent. Operating profit margin rose 160 bps YoY as efficiencies and a decline in raw material inflation helped offset higher advertisement & promotion spends. Recent advertising spends remained near multiyear high, with campaigns including Lever Ayush and Indulekha.


Source: Company

Comparable sales growth in double digits for all segments

Source: Company

Sales across segments of HUL grew in double digits, and that too on a higher base. In the home care segment, the third consecutive quarter of double digit growth was led by fabric wash and household care (Vim) and resulted in market share gains.

Personal care segment gained from broad based growth in hair care and premium segment of personal wash. Oral care grew for the second consecutive quarter, driven by new launches and promotion.

In the refreshment segment, growth was driven by tea and new launches from the Kwality Walls brand.

Naturals/ayurvedic portfolio remain in focus

The company’s growth strategy, off late, has been backed by the focus on the ‘naturals’ portfolio. The management said this portfolio has been growing at ~2.5 times the average growth across all segments of HUL. The growth has been aided by campaigns for brands like Lever Ayush and Indulekha hair oil.

Positive outlook

HUL’s quarterly numbers suggest a steady growth in earnings growth to follow as the distribution channels—both retail and wholesale--have recovered from the GST shock. Further, management observes a steady demand improvement in both urban and rural areas but suggest it is would be early to call it a trend as part of the sales improvement was aided by GST led price cuts.

Additionally, competitive intensity and higher input costs arising out of costly crude oil, remains a key challenge. So the ability to keep costs under check, and maintain growth in sales of premium brands will be key. Further, growth of couple of segments like oral care and popular category of personal wash, needs to be closely tracked in light of competitive pressures

Having said that, HUL with its high rural exposure (40 percent of sales) and well entrenched distribution network, is amongst the key beneficiaries of further uptick in consumption and related policy announcements, in our view. In the near term, as the trade channel headwinds subside, the company is well placed to capitalize on the implementation of e-way bill.

We feel the company’s premium valuation (20 percent ahead of sector median) is justified on account of limited earnings volatility and robust execution capability.

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Anubhav Sahu is Principal Research Analyst, Moneycontrol Research. He has been writing research/recommendation pieces on Chemicals and Pharma sectors along with Equity strategy themes. He has previously worked with Credit Suisse and BNP Paribas.
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