HUL Q1 review: Rural growth yet to come back, but analysts bet on brand, distribution

HUL Q1 review: Rural growth yet to come back, but analysts bet on brand, distribution

NEW DELHI: Hindustan Unilever’s (HUL) June quarter results suggest the FMCG major is yet to see any major revival in rural growth. Given how the Covid-19 pandemic is panning out, some of HUL’s segments may also take longer time to recover, said marketmen tracking the company. Despite this, analysts expect the FMCG giant to eventually emerge stronger given its strong brand and deep distribution network.As per the management, demand in June quarter was a result of channel filling and does not reflect the underlying demand trend. Around 80 per cent of the company’s business reported a 6 per cent growth, offering better growth outlook.

But “The rest of the business witnessed a steep decline and is likely to recover slowly,” said Emkay Global.

HUL, analysts said, is looking to pass on the benefit of lower crude-related costs in terms of price cuts in the homecare segment. But the commodity prices are on the rise and could negatively impact margins in the next two quarters, they said.

“We believe HUL has the right matrix to sail through such challenging times – broad product portfolio, focus on premiumisation and improving distribution means through digital means. We maintain high-conviction buy on the stock with a target of Rs 2,600 against Rs 2,450 earlier,” said Phillip Capital.

HUL reported a volume de-growth of 8 per cent for the June quarter. The de-growth was similar to a 7 per cent fall in volumes in the March quarter. The company had reported a 5 per cent volume growth in the year-ago quarter.

BofA Securities said while the volumes were in-line, sales growth did exceed its expectations. The foreign brokerage sees a robust portfolio and strong execution, coupled with synergy benefits from GSK merger to drive medium-term growth for the FMCG major, as it set a target of Rs 2,530 on the FMCG stock.

JPMorgan said resilient Q1 numbers were supported by share gains. While the management maintained its cautious near-term growth outlook, the foreign brokerage sees HUL being well-positioned for a recovery in the second half of the financial year.

Even though CLSA downgraded the stock to ‘outperform’, it maintained a target of Rs 2,600 on the stock, suggesting business recovery in coming quarters will be critical for valuations.

On Wednesday, the stock traded 2.27 per cent lower at Rs 2,266.40 on BSE. This was the third day of fall for the stock.

The FMCG giant on Tuesday reported a 7.18 per cent year-on-year (YoY) rise in standalone net profit at Rs 1,881 crore for June quarter compared with a profit of Rs 1,755 crore in the year-ago quarter. The numbers were hit by an exceptional loss of Rs 118 crore during the quarter. Besides, the FMCG player saw inflationary trends in skimmed milk powder (SMP), tea, vegetable oil and tomato paste prices during the quarter.

Revenue of the company increased 4.23 per cent YoY to Rs 10,406 crore. During the quarter, the company closed and consummated the GSK Consumer Healthcare’s merger and the nutrition business went off to a good start with 5 per cent growth for the quarter.

“HUL’s underlying revenue performance in the June quarter was a beat versus what we (and the Street) had in mind. We expected the lockdown to have caused a double-digit decline in HUL’s base revenue and a 2 per cent decline for the merged entity (including GSK). What HUL delivered was 7 per cent lower underlying sales and 4 per cent growth including the GSK portfolio,” said JM Financial.

“The GSK nutrition portfolio sales grew 5 per cent, which was better than what HUL’s base portfolio delivered. “June quarter performance included some distributor inventory re-stocking. We reckon that situation will improve here onwards, though some categories such as cosmetics could take longer to adjust itself,” the brokerage said.

Ebitda margin for the quarter at 25 per cent was lower than the 26.2 per cent margin it logged in the year-ago quarter. It, however, was higher than 22.9 per cent margin in the March quarter.

HUL said that the production of sanitisers and hand wash was ramped up by 100 times and 5 times respectively. Over 50 new products were launched during the quarter to cater to the rapid change in demand in the hygiene and sanitisation space, it said.

The management said that April operations were at 70 per cent of the pre-Covid levels due to lockdown-led restrictions and limited manufacturing. The performance in May was relatively better and June growth was in mid-single digits.

The management expects rural demand to remain steady owing to normal monsoon, increase in MNREGA allocation and better crop harvest. Nirmal Bang said the company hasn’t seen any major revival in rural growth rate yet, but is seeing some greenshoots.

Source: ET Markets

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