At Hindustan Unilever, rural growth slows down in Q4

Fast moving consumer goods (FMCG) major Hindustan Unilever Ltd (HUL) said the market has started witnessing moderation in growth, mainly due to rural slowdown.

Rural growth, which was over 1.3 times the urban growth, a few quarters back is converging with the latter. 

Sanjiv Mehta, chairman and managing director, HUL, said while the markets haven’t stopped growing, the moderation is happening primarily in the general trade (GT) and wholesale channels and is more pronounced in the rural markets.

“There is clear evidence and various factors are at play here. Low wage rates and food prices mean there is less money in the hands of the rural people and that’s getting reflected in the consumption pattern. Also, the wholesale channel works with a relatively larger inventory and credit. Accordingly, this segment would have been impacted by the tightening of liquidity,” he said.

Modern trade (MT) is growing, but that’s because a lot of new stores are opening, he said, adding that almost 35% to 40% of HUL’s sales are in the rural markets.

Speaking at the fourth quarter earnings meet last week, Mehta said the rural market trend has reversed in the March quarter. “We have had several quarters of double-digit growth in volume, albeit with the base of demonetisation and goods and services tax (GST), but 9% consumer growth and 7% volume growth are still reasonably good numbers and we are quite satisfied with it. But if you look at it from the potential of a trend, there is very clearly a moderation of the growth rates,” he said.

The moderation is also owing to reasons beyond the macroeconomic factors – slowing down of gross domestic product (GDP) or lower agriculture incomes or wage rates.

Srinivas Phatak, chief financial officer, HUL, said a bit of liquidity crunch has been seen over the past few months. “Given the banking and the non-banking financial companies (NBFC) crisis, not many corporates or people are borrowing to really invest. That has indirectly started affecting the incomes. So there is a direct liquidity crunch that’s affecting operations and there’s a system liquidity that’s not giving enough levers for growth,” he said.

All this has hit consumer confidence, resulting in moderation in the market growths. Additionally, crude and currency also have been volatile.

According to Mehta, FMCG really shines when there is a virtuous cycle of growth. “When there is investment happening, livelihoods getting created, more wages and salaries in the hands of the consumers, savings going up, the feel-good factor what we call is the consumer confidence and the spending that happens,” he said. 

Hoping that the double-digit growth scenario comes back very fast, Mehta said, for crystal ball gazing, there are too many factors into play.

“One is hopeful of a stable government after the elections, that’s so good for the country and I hope we get it. The second important thing is that the monsoons are reasonable. And the third is whichever government comes takes steps to spur the investment cycle. That will lead to the virtuous cycle. And then they will have to look at from a rural lens, how to put more money into the hands of the rural consumers,” he said.

In the January to March quarter, HUL delivered a good quarter on sales as well as margin expansion. While the domestic consumer growth has been 9% the volume growth came at 7%. Earnings before interest, tax, depreciation and amortisation (Ebitda) increased 13%, while margins grew by 90 basis points (bps) - 100 basis points is 1%. Profit before exceptional item was up 13% at Rs 1,590 crore and the net profit grew 14% at Rs 1,538 crore. On the full-year basis, the company crossed an important milestone by recording a net profit of Rs 6,036 crore. According to Phatak, all the three divisions of the company have seen reasonable growth. Home care at 13% experienced very strong volume growth. The 7% growth in beauty and personal care (BPC) was led by premium brands, particularly personal wash products and there was a sustained momentum in the foods and the refreshment business that grew by 9%, he said.

Looking ahead, the company management is of the view that, the near term growth has moderated owing to macro-economic conditions and other indicators. And the company management is of the view that the slowdown in the market will continue for some more time. Looking ahead, the company management is of the view that, the near term growth has moderated owing to macro-economic conditions and other indicators. And  the slowdown in the market will continue for some more time, the HUL executives said.

• Rs 6K crore – HUL’s net profit for the last fiscal, an important milestone 
   
• 9% – Domestic consumer growth during fourth quarter