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The fiscal third quarter earnings of Hindustan Unilever are further confirmation of the thesis of weak private consumption in India.
Although the consumer products company reported robust headline numbers, volumes declined in rural markets and were little changed in urban markets.
The moderation in rural markets was the highlight of HUL’s earnings call and its Chairman and Managing Director Sanjiv Mehta has urged the government to put more cash in the hands of rural consumers.
Rural demand has been moderating (slower growth on a two-year CAGR basis) due to low farm wage growth versus higher farm input cost inflation, said Nomura in a note to clients yesterday.
As we pointed out earlier this month, demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is still much higher than the pre-pandemic times. This is a sign that there are not enough job opportunities out there, much less high-paying jobs.
In the earnings call, Mehta suggested that the government could even look at increasing the outlay on MNREGA which provides guaranteed employment for 100 days.
Things are not expected to improve in a hurry as well. According to the advance GDP estimates for the current financial year, growth in private consumption is expected to be only 1.8 percent in the second half.
All eyes are now on the Budget announcements. A step–up in government infrastructure building will have a rub-off effect on the construction sector, one of the largest sources of employment.
Meanwhile, what should investors in HUL do? Our research team has argued that the moderation in demand and higher commodity prices will impact the company’s performance in the short term. In a separate opinion piece, we also look at whether HUL has made a mistake by flexing its pricing power to protect margins while demand is low.
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