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HUL Q1 result preview: Rural stress may dent volume growth, say analysts

Hindustan Unilever
Amid slowdown in the consumption space, FMCG (fast-moving consumer goods company) bellwether Hindustan Unilever (HUL) is expected to post steady numbers for the quarter ended June 2019 (Q1FY20) owing to its shift towards natural products and increasing premiumisation. 

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The company raised prices by one – two per cent for a few products, which, analysts say, is likely to boost its EBITDA (earnings before interest, tax, depreciation and amortisation) margin. However, higher marketing spend towards new launches and increase in sugar and cocoa prices may cap the upside, they add. 

Volume growth will be dented on the back of stress in rural consumption. That said, high base of corresponding quarter last year (up 12 per cent) due to GST (goods and services tax) implementation benefits should also be read in context.

FMCG companies have posted a mixed bag of results for the first quarter of FY20. While Bajaj Consumer Care and Dabur reported a healthy growth of 9 and 10 per cent, respectively in PAT, Colgate-Palmolive reported a 10.76 per cent decline in net profit at Rs 169.11 crore for the period. All these companies, however, have flagged challenging macroeconomic environment that has resulted in the overall demand slowdown in India.

HUL had posted a 19.2 per cent year-on-year (YoY) rise in its net profit or profit after tax (PAT) at Rs 1,529 crore in the June quarter of the fiscal year 2018-19 (Q1FY19), while sales had surged 12 per cent YoY. In the sequential quarter (January-March 2019), the company had reported a 13.8 per cent YoY jump in net profit at Rs 1,538 crore. 

For the quarter under review, the company is projected to register sales/revenue growth of 9.7 per cent YoY at Rs 10,410 crore. Sequentially, the numbers are likely to rise 4.7 per cent, according to analysts at ICICI Securities. EBITDA is likely to increase 6.1 per cent YoY and 2.9 per cent QoQ to Rs 2,388.8 crore while PAT is expected to come in at Rs 1,642.2 crore, up 7.4 YoY (up 6.8 per cent QoQ). 

The brokerage expects 6 per cent volume growth across categories. "Its shift towards natural products and increasing premiumisation trend is yielding results, helping it to maintain the growth trajectory. Operating margin or EBITDA margin is estimated to contract 78 basis points (bps) to 22.9 per cent due to higher marketing spend towards new launches," it said said in a results preview note.
Edelweiss Securities anticipates revenue, EBITDA and PAT to grow nearly 7.3 per cent, 8.6 per cent and nearly 7.7 per cent, respectively, YoY. It expects HUL to record a volume growth of nearly 5 per cent YoY on a high base of 12 per cent YoY growth. "Q1FY18 was impacted by GST launch hence the way to look at volume growth is three years average which would be nearly 5.6 per cent," they wrote in a results preview note.

Further, they note that softness seen in second half of Q4FY19 continued for the full quarter in Q1FY20 and that the rural growth is now at the same level as urban growth. 

Prabhudas Lilladher sees the slowdown in rural demand to impact volume growth. It expects moderate margin expansion as crude prices have softened QoQ, pick-up in food inflation and recent price increases.

Improvement in rural business, commentary on competition, especially in natural products and oral care, pricing actions and new launches strategy and sustainability of cost-saving initiatives are the key things to watch out for in the results announcement.

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