Tuesday, Oct 04, 2022

Behind The Scenes Of HUL’s 8.6 % Net Profit Rise In Q4

The FMCG giant increased prices, decreased advertising spend, firmed up on technology and built a sturdy strategy to beat inflation blues


Some days are good, some are bad, and some are fantastic. When the pandemic struck, at one point it seemed like it may be the end of humanity. Two years later, we are at the cusp of accepting it as an endemic. On the business side, too, it saw a sea of upheavals. For Hindustan Unilever Limited (HUL), and for most other conglomerates, it brought a slow in demand and a dip in revenues. But like humanity seems to be surviving and thriving post the pandemic, some companies such as HUL -- India’s oldest fast-moving consumer goods (FMCG) company -- continues to be steady and is best prepared among its peers for any disruption. Beating unprecedented inflation, it recorded a rise of 8.6 per cent in its consolidated net profit to Rs 2,327 crore for the fourth quarter ended March 31. Its share price, too, rose four percent in early trade on Thursday after the company announced its Q4 earnings. 

Several factors are responsible for the FMCG giant’s big win -- price hike, decreased advertising spend, technological advancement, and on-point strategy. The company spent Rs 1,296 crore on advertising in the fourth quarter, which was 8.7 per cent lesser than the Rs 1,418 crore spent in the corresponding quarter of the previous year.

In a regulatory filing, the company said its revenue from sales during the quarter was up 10.21 per cent to Rs 13,468 crore from Rs 12,220 crore in the year-ago period. While the company opted for calibrated price hikes, volumes remained flat. The home care segment continued to show robust growth of 24 per cent growth in the fourth quarter and 19 per cent in FY22 primarily due to price hikes to offset high inflation seen in crude-based raw materials. The net sale was up 10.4 per cent to Rs 13,190 crore due to aggressive price hikes. But the company’s growth isn’t demand-driven, as volumes indicated. In fact, the industry saw a contraction of 8 per cent in volumes.

But HUL has a lot more to celebrate. In January, it successfully resolved the standoff with its distributors protesting against the company over pricing parity between traditional distributors and organised business-to-business (B2B) platforms. Plus, last financial year, it became a Rs 50,000-crore-turnover company and also became the first pure-play FMCG firm to achieve the milestone. 

Managing costs

In March, HUL hiked the prices of cleaning & personal care products across stock-keeping units of brands such as Surf Excel Matic, Comfort fabric conditioner, Dove body wash, apart from Lifebuoy, Lux, and Pears soaps citing significant inflationary pressures. The hike was mainly in the home products segment because of the increase in costs such as raw material prices, freight costs & packaging costs due to the Ukraine crisis, and the global supply chain. Two weeks prior to that, the company had raised prices of soaps, detergents, and dishwashing products by 3-10 per cent for its Surf Excel Easy Wash detergent, Surf Excel Quick Wash, Vim bar, and liquid as well as Lux and Rexona soaps and Ponds Talcum powder.

The price hike was a major way to counter costs. “This quarter on a Y-o-Y basis, the company has taken a 10-11 per cent price hike. Though these categories have high pricing power, still there has been a gross margin pressure of around 300 bps (basis points). HUL takes a medium to long-term view on raw materials. Crude oil price ten days back was about $130 and now it’s about $100. Price hike based on this much volatility is difficult. In FY23, I expect a very high gross margin pressure for the entire sector as inflation has been a constant for about two years now. Crude, palm oil, wheat -- everything is up,” explains Abneesh Roy, executive director of Edelweiss Financial Services. 

Decoding its balance sheet further, HUL’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margin at 24.6 per cent remained healthy despite high inflationary headwinds. Experts believe that although the gross margin is likely to be under pressure in the near term, an improving portfolio mix along with cost control and price hikes should aid the EBITDA margin. “HUL cut advertising costs. Local players cut advertising expenses during high-inflation periods. FMCG advertising has come down about 20 per cent in terms of volumes across the sector. Apart from this, HUL has also been very proactive in all other cost items. They are using a lot of automation to manage costs,” Roy said. 

The poster boy of India’s FMCG has been fighting inflation woes comparatively better, experts agree. In FY21, the company posted a net profit of Rs 7,954 crore, up from Rs 6,738 crore in FY20. Its FY21 revenue was Rs 45,996 crore compared to Rs 38,785 crore in FY20. In comparison, Nestle India, another FMCG major, reported a 20 per cent decline in its net profit at Rs 386.66 crore for the fourth quarter ended December 31, 2021, as the company faced inflationary headwinds on raw material inputs. It had posted a profit of Rs 483.31 crore in the same period a year ago. For the year 2021, Nestle India's net profit was up 3 per cent to Rs 2,144.86 crore, as against Rs 2,082.43 crore a year ago. 

Road ahead

According to experts, compared to its peers, HUL is better prepared both in terms of technology and e-commerce strategy to deal with the disruptions going forward. HUL has continued to grow significantly ahead of the market, gaining value and volume market shares. "In challenging circumstances, we have grown competitively and protected our business model by maintaining margin in a healthy range," Sanjiv Mehta, chief executive officer and managing director, HUL said in a statement. “Consumers don't buy in isolation. At the end of the day, they assign certain money for the household budget and expenses are not going up just in FMCG. If you look at edible oil, or even grains, the costs are going up. So then they have to rationalize money. And when they rationalize the spends, that's when they titrate the volume," Mehta said. 

But going forward, certain challenges still remain, especially with respect to palm oil which is one of the key inputs for several FMCG products. Indonesia, which is the biggest edible oils exporter globally, has widened the scope of an export ban to now include crude palm oil. The ban is now applicable to used cooking oil, RBD palm oil, and crude palm oil. This would add to the price volatility the commodity is seeing and could worsen the food inflation seen globally. 

“In the future, the challenge for HUL as well as companies from the entire sector would be to how to keep their costs in check. Palm oil goes into everything from chocolates to cosmetics. Most companies wouldn’t have a choice but increase prices. If volume growth worth 5-6 per cent does not kick in for a company as big as HUL, a price rise has to happen. In the short term, there would be margin pressure,” says Avinnash Gorakssakar, head of research at Profitmart Securities. 

For now, it’s time to raise a toast to HUL.