Highlights:
- Volume-led growth with strong performance in home care
- Rural demand moderates to 1.1 times from 1.3 times that of urban
- Mass brands - Lifebuoy and Lux – impacted; seasonality benefits ice cream and skin category
- In Naturals, focus shifts to south; oral care performance stabilising
- Key positives - strong agility in supply chain and product innovation
- Recent M&A integration remains a key watch
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Hindustan Unilever (HUL) delivered volume-led growth in Q4 FY19 amid challenges like moderation in rural demand and oil price volatility.
Key positives Domestic sales growth of nine percent year-on-year (YoY) was aided by a seven percent volume growth on a relatively high base of 11 percent in Q4 FY18. While volume growth moderated in line with sectoral trends, the company’s outperformance versus peers merits attention.
FMCG volume growth
Divisional performance
Home care segment (35 percent of Q4 sales) saw another quarter of double-digit growth, led by performance in household care (Vim and Domex) and premiumisation trend in the fabric wash category. Strong performance was witnessed in food and refreshment (19 percent of sales), backed by seasonality and new launches in ice cream category. In fact, this category already seems to be reaping the benefits of the integration of Aditya Milk in terms of innovations.
EBITDA margin (up 90 bps YoY) improved on account of lower advertising and employee cost (as a percentage of sales) and cost rationalisation partially offsetting lower gross margin. Operating margin improvement was seen in all segments.
Key negatives Contraction at the gross margin level reflects impact of higher crude oil linked cost in the quarter gone by. Raw material price volatility in the home care segment remains a key factor to watch out for. However, benign cost inflation in other segments (barring tea category) is comforting. In the case of tea, a new crop in June/July would be crucial in determining the demand-supply balance.
Personal care segment (44 percent of sales) witnessed a sharper moderation in growth due to weak performance by mass brands such as Lifebuoy and Lux. Deodorants was another category where the company faced high competitive intensity. Better performance in skin care was not a surprise as the category continued to do well on account of longer winter in north India.
The most important takeaway from the analyst conference call was moderation in rural demand, which is now 1.1 times urban demand from 1.3 times earlier. Moderation in the rural-urban growth gap is similar to that assessed by Dabur. The management cautioned about further moderation unless the new government takes measures to perk up demand.
Other observations The oral care segment continues to witness better performance on account of pricing and promotional strategy. The management sees a better-than-market performance for brands -- Closeup and Lever Ayush -- implying marginal market share gains. However, Pepsodent remains a weak spot. It is difficult to say if the company is out of woods in terms of competitive intensity (Dabur, Patanjali Ayurved and Colgate-Palmolive India), but its market performance appears to have stabilised for now.
In case of Naturals, the company has focused its attention to south India, where there is higher acceptability for ayurveda-based products. At present, there is a tactical retreat from the northern and central India with respect to Ayush brand in terms of product placement and promotion. The management said its ayurvedic hair oil, Indulekha, has seen exceptional performance and is now an around Rs 400 crore brand (up four times since its acquisition in 2015).
Outlook Seen in the context of near-term challenges (rural demand and oil led cost inflation), HUL’s performance is noteworthy. Since the rollout of GST, the management has tweaked its supply chain and increased product innovation. This has helped it in operating during difficult market situations like the one we are facing at present. The additional lever which has helped the company is its investment behind brands and visibility.
We also remain positive on the company’s recent M&A deals and feel its emphasis on the food and refreshments business could be the next strategic growth lever. However, there would be a gestation period of four-to-five quarters before reasonable synergistic benefits accrue.
As far as the stock is concerned, investors should use the current consolidation phase as an opportunity to accumulate on dips.
The HUL stock currently trades close to 41 times its FY21 estimated price-to-earnings after including benefits arising from the GSK Consumer Healthcare India deal. Regulatory approval on the merger is expected by December. We expect the company’s premium valuation to sustain as it factors in innovation profile, limited volatility in earnings and strong execution capability.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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