HUL Q4 numbers not too bad, but investors may need to moderate expectations

After a weak show by some of India’s important fast-moving consumer goods (FMCG) companies like Britannia and Dabur India, expectations from Hindustan Unilever (HUL) were also somewhat muted. Accordingly, the HUL stock on Friday fell by over two per cent before the result was announced after market hours.

However, the numbers were not too bad, except that for the net profit. At Rs 9,809 crore, the company’s revenue in the March quarter (Q4) grew by nine per cent year-on-year; 50 basis points lower than the Bloomberg consensus estimate of Rs 9,858 crore. Net profit (before exceptional items), at Rs 1,590 crore (up 13 per cent year-on-year), however, missed the estimate of Rs 1,651 crore.

That said, investors should not get bogged by this; despite a tough operating climate, HUL managed to expand its operating profit margins (earnings before interest, tax, depreciation and amortisation, or Ebitda) from 23.1 per cent last year to 24 per cent in Q4. While the cost of goods sold as a proportion of revenues remained at 48 per cent year-on-year, advertising costs and other expenses grew at a slower pace than revenues at 3.5 per cent and 8.5 per cent year-on-year, respectively. The Street had pegged margins between 23 and 24 per cent.

The margin expansion was comfortably aided by growth across segments. HUL’s mainstay product line — beauty and personal care segment, which accounts for about a half of its revenues — maintained margins at a comfortable 28 per cent, while its food and refreshments and home care segments retained operating margins of 18 per cent each.

This indicates that price hikes undertaken by HUL in the past year, coupled with its efforts to improve the share of premium products, particularly in the beauty segment, yielded the desired result. Volume growth, at 7 per cent, was at a six-quarter low, but it met expectations of 6-8 per cent coming against last year's high base of 11 per cent growth.

For investors, though, volume growth will be a larger concern going ahead. “Rural growth, which was ahead of urban growth earlier, is now on a par and we see near-term growth moderation,” said Sanjiv Mehta, HUL’s chairman and managing director. Analysts at ICICI Securities also noted that with volume growth moderating for five consecutive quarters demand was peaking out in certain sections of rural areas.

With HUL committed to delivering volume growth, analysts say there is room to cede margins. “While HUL may not take immediate price cuts, it has the leeway to do so if competition hots up,” says an analyst from a domestic brokerage.

Against this backdrop, investors will need to moderate their near-term expectations from the country's largest consumer company. The HUL stock has also corrected about nine per cent in 2019, and valuations have moderated from 70x FY20 earnings to 59x earnings. 

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