Unilever cuts sales guidance as growth concerns in India market remain

Topics Unilever | Hindustan Unilever | HUL

Unilever, the world’s second-largest consumer goods company, has cut its sales guidance for calendar years 2019 and 2020 amid growth concerns in India, its largest market by volume and second-largest by value. 

The unscheduled sales update on Tuesday, which said underlying sales growth would be below guidance in 2019 and in the first half of 2020 because of a slowdown in South Asia and weakness in West Africa, sent Unilever’s stock price tumbling 6.6 per cent in Amsterdam, its steepest decline in three years. The Indian investor response, however, was muted to the development.

Hindustan Unilever (HUL), in which parent Unilever has a 67 per cent stake, saw its stock price decline 0.48 per cent on the BSE to Rs 1,964.45 per share. Sector analysts said growth concerns had been priced in, with the company management indicating that near-term recovery would be weak.

“In the last month and a half, HUL’s stock price has corrected from levels of about Rs 2,179 per share to Rs 1,964 now. During the company’s second-quarter results for FY20, the management said challenges remained in the domestic fast-moving consumer goods (FMCG) market and that rural growth had halved versus urban growth,” said Naveen Trivedi, research analyst at HDFC Securities. “I am, therefore, not surprised with the street reaction to today’s global development,” he said.

But some analysts remain wary, saying the slowdown may prolong in India and that Unilever's sales update is an indication of that. “Contrary to Street expectations of a demand recovery in the second half of FY20, the environment has continued to deteriorate,” said Nitin Gupta, FMCG analyst at SBICap Securities. “According to our channel checks, month-on-month growth has deteriorated gradually in October and November of 2019,” he said.    

“With no material impact from steps taken by the central government, rural growth has continued to decelerate sequentially,” he added.

Market research agency Nielsen has already forecast a low single-digit FMCG growth rate for the October-December period versus mid-single-digit growth seen in July-September for the market. The research agency also said rural growth had crashed to a seven-year low in the September quarter to 2 per cent and that weakness would remain in the subsequent months as well.

HUL derives 40 per cent of its sales from rural areas, higher than the industry average of 33-35 per cent, exposing it to a greater risk than other companies, sector experts said, if rural consumers curb spending. Which is why Sanjiv Mehta, chairman and managing director, HUL, had indicated in October that income transfer to rural areas would be a key monitorable. “The reason for the moderation in FMCG growth rates is due to the slowdown in rural areas. It is sharper than in urban areas and while the government has taken key policy initiatives in the last few months to spur demand, how this pans out in rural areas would be something to watch out for,” he had said.



Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel