HUL: HUL needs rural spark, lower input costs to drive volume push

The operating profit margin stood at 23.8% – 20 basis points higher than the year-ago level. One basis point is a hundredth of a percentage point.

HUL closed 1.8% lower on Wednesday.

Incidentally, the silver lining has been the underlying volume growth at 4% – the highest in the past five quarters – aided by the spending on advertising and promotion. The company spent nearly 11% of its revenues on advertising. It took price corrections especially in fabric wash and household care products – passing on the benefit accruing from the softening of commodity prices.

While the revenues of the home care, beauty & wellbeing and food & refreshment segments grew in low single-digits, that of personal care declined by 4.5% due to price cuts.

Agencies

In terms of profitability, the home care and food & refreshments segments posted an increase in their segmental margins while the beauty and personal care portfolio faced a decline. The food and refreshment category was impacted by a harsh summer season.HUL is driving premiumisation across its portfolio in terms of leading trends, leveraging technology and delivering new formats and benefits. During the quarter, the company re-launched brands such as Vim, Lux and Lifebuoy with superior formulations. In fact, the contribution of its premium portfolio has increased by 300 bps over the last three years. It has reshaped its portfolio in certain high-growth categories. These include Rin liquid detergent, Vaseline’s first overnight serum in lotion, Lux body wash, and international cuisine in the form of Hellmann’s mayonnaise.With the rural demand gradually improving, the company expects to drive volume-led growth going ahead. In case the commodity prices remain at the current levels, price increases may not be needed. The operating margins are expected to be maintained at the current levels – facilitated by cost savings and productivity programmes.

The stock has gained 5.5% in the past year and is trading slightly lower than its 52-week high. A good monsoon and input cost inflation are factors to watch out for in the case of the FMCG industry. While a good monsoon augurs well for spurring rural demand, benign commodity prices would ensure minimal price increases. However, climate change and geo-political conditions don’t render the scenario easy.