HUL needs a magic wand for recovery after subdued Q3
The waiting game for things to improve continues at Hindustan Unilever Ltd (HUL). Even though expectations were low, the company’s below-estimated year-on-year flattish volumes in Q3FY25 are a niggling worry. The villain is known: muted demand.
Operating conditions in Q3 were marked by sustained gradual rural recovery, moderating urban demand, faster growth in small packs than large ones and premiumization. In this backdrop, HUL’s dull volumes are a function of an adverse mix as its home care business and smaller packs outperformed.
The company’s pricing performance was better than the previous four quarters, aiding the almost 2% growth in Q3 operating revenue. Growth was also helped by 4-5% price hikes in soaps and tea.
Also Read: HUL reports flat volume growth amid shift to smaller packs in urban markets
HUL expects moderation in consumption trends to persist in the near-term. Also, if commodity prices remain where they are, near-term price growth is expected to be in the low-single digit.
Amid inflationary pressures, Q3 gross margin contracted 83 basis points (bps) to 50.7%. However, lower advertising and promotion expense curbed the Ebitda margin drop to just 14 bps at 23.2%. Thus, Ebitda was up 1% versus a year ago to ₹3,570 crore.
Also Read: What HUL’s decade-long plan tells us about consumption in India
Meanwhile, to drive premiumization in the beauty and wellbeing segment, HUL has signed an agreement to acquire 90.5% of actives-led premium beauty brand Minimalist for ₹2,955 crore whose current annual revenue run-rate is above ₹500 crore. The move is a step in the right direction.
“Under HUL, we see Minimalist clocking similar success as seen in Indulekha (expanded 6-7x since acquisition), leveraging its offline distribution might,” said Emkay Global Financial Services.
HUL’s shares have been largely flat in the past one year and triggers for the foreseeable future seem limited. At a broad-based level, its fortunes are closely tied to how macro factors such as food inflation, real wage growth shape up.
“Key challenge in our view is to revive growth in soaps, mass skin care and food & refreshment, where underlying sales growth has been declining,” said analysts from JM Financial Institutional Securities.
“Interventions have been made (in terms of new formulation/price architecture change, etc.) & pace of recovery here will be key for sales growth to revert to high single digit trajectory (versus low-single-digit growth seen in FY24/9MFY25),” they added. But the path to recovery can be stretched, testing investors’ patience.
Also Read: HUL needs growth mojo. But demand conditions may play spoilsport
