Hindustan Unilever Ltd (HUL), the Indian arm of consumer goods giant Unilever, is bracing for a tepid December quarter (Q3 FY24) with flat sales and volume growth, according to analysts’ forecasts. Price cuts across segments and a lacklustre festive season are expected to dampen the topline while rising input costs could offer some respite through margin improvement.
Volume woes linger: HUL, known for brands like Lifebuoy, Dove, and Lipton, has been grappling with sluggish volume growth since the September quarter of FY23. Analysts predict this trend to continue in Q3 FY24, with volumes hovering between 2% and 5%. The weakness is attributed to a muted rural demand revival and increasing competition from smaller regional players chipping away at HUL’s market share.
Price cuts bite into topline: To counter the volume stagnation, HUL has resorted to price cuts, particularly in the laundry segment under its home-care category. This strategy, while potentially boosting volumes, is expected to impact the topline, leading to a projected 0.5% year-on-year (YoY) growth for the category, according to Kotak Institutional Equities.
Margin improvement a silver lining: Despite the topline challenges, analysts anticipate a 77 basis points improvement in HUL’s EBITDA margin to 24.1% in Q3 FY24. This uptick is primarily driven by a 470 basis points YoY jump in gross margins due to a decline in key input costs like palm oil, tea, and coffee. Lower input costs provide some relief for HUL, offering a buffer against the margin pressures from price cuts.
Beyond the overall picture, analysts predict varying performance across HUL’s key categories:
- Home care: The aforementioned price cuts are expected to hold back growth to a modest 0.5% YoY, according to Kotak Institutional Equities.
- Personal care: This category, encompassing brands like Dove and Lakme, is projected to see a slightly better performance with a 3.5% YoY growth, driven by continued demand for premium beauty products.
- Food & refreshments: This segment, including brands like Knorr and Lipton, is estimated to grow around 3% YoY, supported by sustained demand for staples and convenience food options.
Market outlook and challenges:
While HUL’s Q3 FY24 performance is expected to be subdued, analysts remain cautiously optimistic about the company’s long-term prospects. The ongoing rural demand revival, coupled with HUL’s focus on premiumization and digitalization, are seen as potential growth drivers. However, challenges like inflation, competitive pressure, and potential disruptions from the upcoming general elections remain concerns.
HUL’s Q3 FY24 preview paints a picture of a company navigating a challenging market environment. While the flat sales and volume growth may dampen investor sentiment in the short term, the expected margin improvement and long-term growth potential offer some reassurance. Investors will be closely monitoring the actual results and HUL’s commentary on future strategies to gauge the company’s ability to overcome headwinds and remain a leader in the Indian consumer goods market.
The expected 77 basis points increase in HUL’s EBITDA margin to 24.1% could be seen as a positive sign by investors, indicating the company’s ability to manage costs effectively even in a challenging environment. This could lead to a higher valuation for the stock.