Hindustan Unilever’s investors are factoring in a much brighter outlook

Nobody expected Hindustan Unilever Ltd (HUL)’s June-quarter results to be earth-shattering amid the covid-19-led demand disruptions. So, the figures are not disappointing.

It reported revenue growth of 4.2% year-on-year to ₹10,406 crore in the quarter. This was the boost from the merger of GSK CH India with HUL. Excluding GSK, the company’s domestic consumer business sales declined by 7%, reflecting the pandemic impact. “HUL’s Q1FY2021 performance was better than our, as well as Street expectations, with a volume decline of 8% as against our as well Street expectations of 11-13% volume decline,” Kaustubh Pawaskar, associate vice-president, research, consumer goods and discretionary, Sharekhan, said in a note.

According to HUL, about 80% of its portfolio, comprising health, hygiene and nutrition, has grown 6%. On the other hand, about 15% of its portfolio, which is discretionary and saw supply constraints, fell by 45%. The rest of the portfolio, comprising water, ice cream and food solutions, fell drastically by 69%, due to the huge impact on out-of-home consumption. Excluding the GSK impact, HUL said, its segments: home care, beauty and personal care, and food and refreshment reported a sales decline of 2, 12% and 4%, respectively.

Overall, HUL’s gross margin shrank by 222 basis points. One basis point is one-hundredth of a percentage point. True, the earnings before interest, tax, depreciation and amortization (Ebitda) margin decline was arrested. The Ebitda margin contracted by only 110 basis points to 25%. Even so, an analyst, requesting anonymity, said: “Ebitda margin performance is slightly disappointing given that advertising and promotion expenses declined by 31%.” Employee costs rose steeply and, to that extent, weighed on the Ebitda margin. Plus, other overhead expenses increased 171 basis points as a percentage of revenue, further impacting operating leverage. Meanwhile, investors have little to complain. The outlook for consumer companies is better than many other industries. The sale of essential items cushions the pain of covid-19 times.

The HUL stock is about 1% higher than its pre-covid highs in February on the NSE. But, this also means valuations are not inexpensive. The shares now trade at a valuation multiple of about 75 times trailing 12-month earnings. “We believe soaps, sanitizers and home-care products would continue to grow at a strong pace, given per capita consumption of hygiene products can increase manifold. However, localized lockdowns would continue to impact supply in Q2FY21 as well,” said analysts from ICICI Direct Research in a note.

Of course, investors will watch for signs of improvement in consumer confidence in the days to come. On the demand front, it’s challenging to predict the near-term due to the pandemic. Even so, the stock’s high valuations suggest that investors are factoring in a brighter picture.