Sluggish urban market to weigh on HUL, price hikes may help

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, ET BureauLast Updated: Oct 24, 2024, 05:57:00 AM IST

Synopsis

High raw material costs limited the margin gains even as the company spent less on advertising during the quarter. The raw material cost grew 5% on year and constituted 49.6% of the revenues, driven by inflation in tea and crude palm oil prices. The company's ad spends declined 15% on year with these spends standing at 9.5% of net sales.

ET Intelligence Group: FMCG bellwether HUL posted a disappointing performance in the quarter to September, which was characterised by a modest 2% growth in revenues, 3% rise in volumes and 4% drop in net profit. Excluding one-off impact of an indirect tax item in base year, net sales rose 3%, net profit growth was flat and so was operating margin.

High raw material costs limited the margin gains even as the company spent less on advertising during the quarter. The raw material cost grew 5% on year and constituted 49.6% of the revenues, driven by inflation in tea and crude palm oil prices. The company's ad spends declined 15% on year with these spends standing at 9.5% of net sales.

The home care business segment-the largest of all-posted the best revenue growth of 8%. By contrast, the personal care segment witnessed the most decline of 5% on back of pricing actions taken during the year. All segments posted double-digit margins. Going ahead, the company plans to take calibrated price increases to pass on the input cost inflation.

Agencies

HUL's board has decided to separate the ice-cream division in line with the decision of its parent to separate its ice-cream business. According to the company, the high growth, low margin ice-cream segment contributes 3% to the HUL's turnover and requires significant investments and a different operating model including cold chain infrastructure and a distinct channel landscape that does not share synergies with rest of the HUL's portfolio.

The volumes of ice-creams for the quarter remained flat on year. The growth in urban markets has moderated which does not augur well in the near term for the company which earns two-thirds of its revenues from the urban markets. The recovery in rural markets remains gradual.

With a modest gain of 7%, the HUL stock has significantly underperformed the benchmark index over the past one year. Subdued consumer demand amidst a cost inflationary environment does not imply a very encouraging prospect for the stock in the near term. While hiving off a non-core business is good news, losing 3% of the business (ice-cream segment) creates a further overhang on the stock. For now, HUL's shareholders will have to contend with the dividend income with the company announcing a total dividend (interim + special) of ₹29 per share.

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