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.