HUL’s Q3 is resilient, but times are tough

Analysts expected this to adversely affect the sales performance in the quarter and it ultimately failed. HUL’s underlying volume growth last quarter was 2% compared to growth of 4% in Q3FY21. Volume growth was also slower in the third quarter compared to the second quarter.

Nevertheless, HUL’s total operating revenue grew 10.4% year-on-year (YoY) to nearly . Done 13,090 crore in Q3. Revenue growth was driven by 23% growth in the Home Care segment, which was also helped by a favorable base, given that the division’s revenue declined 1% in Q3FY21. “Also, aggressive price hikes were carried out to pass on the high commodity inflation over the past six months,” analysts at ICICI Direct Research said in the first cut note.

Thus, the company was able to see an EBITDA margin expansion of 100 basis points (bps) to 25% on a year-on-year basis. Ebitda is earnings before interest, taxes, depreciation and amortization. One basis point is one hundredth of a percentile. Sequentially also the Ebitda margin is higher by around 40 bps. This time around, Ebitda margin performance was also helped by lower advertising and promotional spends.

While this is a good sign, HUL is cautious and expects margins to remain under pressure from a near future perspective. Commodity pricing pressures are proving relentless, remaining volatile and high. The company expects to see more gradual inflation in the current quarter. At the same time, calibrated pricing actions are likely to continue with cost-saving efforts.

In the coming days, inflationary pressures can be expected to keep the volume growth expectations under control. Further, pointing to a slowdown in the rural market, business conditions with HUL are expected to remain tough, even though the company has seen decent market share. The economy is still recovering, HUL chairman and managing director Sanjiv Mehta said in a post-earnings media call. “The only way for rural consumers to tackle this kind of inflation is to have more money in their hands,” Mehta said.

In Q3, growth was broad in the home care segment, with strong performance in fabric wash and home care. The beauty and personal care (BPC) segment had revenue growth of 7%, which is underwhelming. In BPC, HUL’s skin cleansing, skin care and complexion cosmetics did well. Revenue in the Food & Refreshment segment grew 3.3% on a strong basis. The company said the tea portfolio has continued its strong performance.

“We would consider this quarter’s performance to be slightly better than expected and expect a positive response, as the stock has declined sharply over the past few months,” Yes Securities Ltd said in an earlier cut note.

HUL stock has underperformed the benchmark Nifty 50 and Nifty FMCG indices in the past one year. The stock has lost nearly 4% in the past one year with the Nifty 50 and Nifty FMCG index gaining 21% and 6% respectively.

Based on data from Bloomberg, the stock is now trading at about 50 times estimated earnings for fiscal year 2023.

Some analysts believe valuations are comfortable given the correction from higher levels. Nevertheless, weak rural demand and cost inflation remain major concerns for the stock in the near future, which could keep a meaningful bounce off.