HUL’s December quarter a let-down; stock remains in no man’s land

This performance, consistent with the 2% and 3% growth seen in Q2 and Q1, respectively, aligns with analysts' expectations but remains underwhelming against a backdrop of unchanging demand environment as indicated by the market volume two-year CAGR (compound annual growth rate) of 2%. Factors like subdued mass market consumption and a delayed winter season have contributed to this stagnation.

To add to that, HUL's strategy of reducing prices in key categories like laundry and skin cleansing to spur demand has meant that total operating revenue at ₹15,188 crore was flattish year-on-year. Pricing growth turned negative in Q3 and can remain under pressure in the foreseeable future.

Not surprising then that HUL’s shares fell by over 3% on Saturday. As such, the stock has put up a weak show on the bourses for a while now amid delayed recovery in demand, especially in rural markets.

“For nearly three years, HUL’s share price has stayed range-bound, and Q3FY24 failed to inspire any investor confidence with a miss on revenue as well as margin (Ebitda was flat year-on-year)," said analysts from Jefferies India in a report titled ‘Stock remains in no man’s land’ on 19 January. Ebitda is earnings before interest, tax, depreciation and amortization. In Q3, HUL’s Ebitda, excluding income from other sources stood at ₹3,540 crore. Ebitda margin improved slightly year-on-year to 23.3%.

But a meaningful uptick in this metric does not seem to be on the cards at least in the near term. True, there is enough room for gross margins to improve as they remain below pre-pandemic levels. But gains here would be funnelled towards marketing. In Q3, advertising and promotion spends formed nearly 11% of revenue and a further step-up cannot be ruled out given that the competition is heating up with the return of regional players. In fact, HUL expects the quantum of businesses winning market shares to drop from the current levels of 60% in the upcoming quarters.

Segment-wise, HUL's home care and beauty & personal care categories, accounting for about 75% of revenue, saw mid-single digit volume growth, but revenue declined nearly 1% due to price cuts. In the home care segment, fabric wash volumes grew, led by premium products, while skin cleansing revenue in the beauty & personal care segment dropped due to price reductions reflecting lower commodity costs taken to pass on the benefits of lower commodity costs to consumers. 

Conversely, the foods & refreshment business saw a marginal 1% revenue growth, driven by price increases in response to high food commodity prices, with the tea category witnessing consumers downgrading.

However, all is not lost. “Despite rising competitive intensity, we believe it has one of the better arsenals versus peers to drive margins," said Mihir Shah, analyst at Nomura Financial Advisory and Securities (India) in a report on 20 January. Nomura has cut HUL’s earnings per share estimates for FY24, FY25 and FY26 by 3%, 6% and 4%, respectively, to factor in Q3 results.

HUL remains hopeful of a gradual recovery, bolstered by improved winter crop yields and rural income growth. For sentiment to improve, it is critical that volume growth accelerates, especially as pricing growth is expected to be marginally negative if commodity prices remain where they are.