Tuesday, June 6, 2023
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HUL finds it challenging to escape the inflation tiger

According to the 37th slide of Hindustan Unilever’s March quarter results presentation, price and growth will rebalance. In fact, price is a factor, with price-driven growth of 7 percent during the quarter, down from 11 percent in the December quarter. The volume growth rate of 4%, however, is not acceptable and is actually one percentage point lower.

As the prices of an increasing number of inputs decline from their maxima, the contribution from price will continue to decline. Several commodities, including petroleum oil, palm oil, chemicals such as soda ash, and cereals including barley and wheat, have experienced a decline in price. To remain competitive, HUL will need to reduce prices and pass on savings to consumers. Despite this, the company maintains optimism that volume sales growth will rebound to higher levels. It is a challenging circumstance.

Years of high inflation have severely harmed consumers with reduced incomes. Why, even in the March quarter, when prices of key products such as detergents and cleansers softened, the volume growth of the FMCG market was stagnant while rural growth declined by 3 percent? The only consistent support for companies like HUL has been the drive to sell more premium products, which has contributed to an improved sales mix and supported margins despite rising costs.

In the March quarter, Hindustan Unilever’s sales increased 11 percent compared to the same period last year, and its gross margin improved sequentially due to lower costs. However, due to lacklustre demand, HUL reinvested these savings in increased advertising and promotions. The net result was an EBITDA margin of 23.7%, an increase of only 10 basis points sequentially. As savings on input costs are partially passed on to consumers and partially invested in advertising and promotion, this trend may persist for some time.

At some point, reduced prices should lead to a recovery in volume growth, with the economic conditions of lower-income consumers presumably also improving as a result of lower inflation. In addition, there are limits to the extent to which premium product pushes can continue to drive performance.

However, HUL’s unwillingness to allow margins to fall below a certain level could be an additional obstacle on the path to higher growth. If the competition is willing to do so, it could result in share erosion. In its home care and food and beverage categories, HUL’s segment margin in the March quarter was identical to that of the December quarter, despite a decline in sales growth. In addition, the segment margin for beauty and personal care increased by one percentage point, but growth remained unchanged.

HUL has made a conscious decision to maintain margins at a certain level and strive for higher development within that framework. In fact, one reason why volume growth will recover regardless is the increased gramme weight of fixed-price packets as a result of declining input costs. But HUL must also contribute to volume growth in addition to relying on favourable external conditions. If a slight decline in profit margin can help revitalise growth and ensure continued competitiveness, then the short-term sacrifice will be worthwhile. Otherwise, fiscal year 24 may be characterised by low price growth and steady volume growth.

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