HUL likely to report volume growth, but revenue likely to dip

Hindustan Unilever or HUL, the largest FMCG company in India, is likely to report a volume growth of around 6%, in line with the growth reported in the last three quarters, while the overall revenue could be lower by 4-5% due to price cuts.

The Mumbai-based bellwether of fast-moving consumer goods, which will report its fourth quarter and fiscal year earnings later today, is expected to post this performance against a backdrop of benign input costs and subdued sales due to drought and low rural incomes.

The situation has turned slower with rivals Godrej Consumer, Emami, Dabur and Marico also showing mixed growth in the fourth quarter as companies continue to push sales via price cuts and promotions.

The impact of heightened competition from Patanjali Ayurved is also an area to watch out for. Close to 40-45% of HUL’s portfolio has competing porducts from Patanjali, analysts estimate.

“In soaps and detergents, HUL’s A&P spends continue to be high which will drag profitability in fourth quarter. Oral care continues to witness slow growth. Overall market demand continues to remain challenging. Rural demand continues to be subdued and no respite is seen in urban demand,” said Abneesh Roy of Edelweiss Securities.

Rural sales account for around 40-45% of HUL’s total sales, so its commentary on that will be closely watched. Its margins are expected to rise driven by lower input costs, although some of the margin gains would have been ploughed back into higher advertising spends.

“We expect HUL’s gross margins to expand 220 basis points year-on-year, aided by sustained softening of key inputs. But, expect EBITDA margin expansion to be curtailed at 90 bps due to higher advertising and sales promotions,” said Rohit Chordia and Anand Shah of Kotak Institutional Equities.

While growth may remain subdued in the next 2-3 months, sales are expected to pick up in FY17, helped by the seventh pay commission payouts later this year, and an expected pickup in rural consumption if the monsoons are good this year. Several rural growth oriented measures announced in the Budget are also expected to pave growth over time.