Hindustan Unilever profit rises 19% as rural demand returns

Fast moving consumer goods (FMCG) major Hindustan Unilever Ltd (HUL), which reported 19% growth in profit after tax (PAT) at Rs 1,529 crore in line with street expectations, said that rural growth has started to bounce back and is growing higher than urban. However, the company top management added that that it is the market behaviour over the next few quarters that will help decipher whether a trend is emerging.

Sanjiv Mehta, chairman and managing director, HUL, said, the baselines were earlier impacted first by demonetization and then by the implementation of goods and services tax (GST). "One needs also to remember that the off-take would not have changed as much as the reported numbers of the company's changed, because of the change in the pipeline. If you look at the numbers, the period between 2010 and 2012 saw markets grow in double digit and the year 2012 witnessed the highest growth in teens. Then we saw a slowdown happening that bottomed out in 2016 when we had the impact of two consecutive years of drought and as a result demand came down," he said.

A big shift post 2016 was that the rural growth had come below the urban growth. However, according to Mehta, the good news is that rural growth has again started to bounce back. "May not be as much as some of the great historical years, but it is certainly growing higher than urban," he said.

Elucidating the market scenario over the last 12 weeks, he said that growth in market volumes was between 5% and 5.5% while the Nielsen reported growths are around 6-6.5%. "That's where the markets are. So, let us wait for a couple of quarters more because you'll then be able to see the full impact of monsoon also and the base would have been corrected to see how the markets are standing out. We believe that it has bottomed out certainly. The question is, when it starts going back to its full potential that exists in out category," he said.

The HUL management said that there is continuity in gradual improvement of demand and that it has delivered a strong volume-led growth in the quarter ended June 2018. In line with analysts' estimates, HUL's domestic consumer growth was up 16% and the underlying volume growth stood at 12%. Earnings before interest, tax, depreciation and amortisation (ebitda) stood at Rs 2,251 crore for the June quarter of fiscal 2019, ebitda margin for the quarter was up 100 basis points (bps).

Srinivas Phatak, chief financial officer, HUL, said that cost of goods sold was lower during the quarter. "It was due to the combination of judicious pricing and continuing savings agenda. Our investments in advertising and promotions (A&P) has been stepped up to support innovations, activations and competitive actions. We have also opened a specific range of male grooming products for e-commerce. It's one of the things that we will pilot, build and take them forward in the newer segments that will get added," said Phatak.

The quarter also witnessed special items in the form of supply chain reorganisation that, according to company management, has started to play out in the post goods and services tax (GST) scenario between now and the next few quarters depending on how the company's plans get executed.

"It's (number of warehouses) at 40 and eventually by the time we complete the full journey, we should be between 18 and 20. We currently are half way through reducing by eight to 10 and that's a continuous process we are looking at. Along with that, there will be a lot of reorganisation of the full supply chain. We'll have multiple players as we do it and will continue to work through on that. But again, it's something that will take the next 12 to 18 months before it's completely done," said Phatak.

In terms of cost benefits, he said, "It will improve operational efficiencies and aid gross margin, but we are not going to comment on the specifics on what it costs and how much it adds. But now we will start to design a supply chain that's meant for operations," he said.

In the near term, HUL management said it continues to see a gradual improvement in consumer demand however elements, crude volatility and currency-led inflation as some of the elements that need to be watched out for. "This is true more so in specific categories. A step-up in competitive intensity is anticipated and we'd called out this in the last quarter and we continue to believe that this will play out (in the coming quarters as well)," said Phatak.