Hind Unilever feels the drought pinch

Hindustan Unilever, India's leading fast moving consumer goods (FMCG) company and a barometer of consumer demand, reported a soft January-March quarter on slowing rural growth.

Sanjiv Mehta, chief executive officer and managing director, HUL, said the rural market that contributes 40% to the company's revenues used to grow at twice the rate of urban growth earlier.

"Until the December 2015 quarter it was growing more or less at the same level. However, now it is growing at a rate less than urban," he said.

Consequently, HUL reported a tepid 7.02% increase in standalone net profit at Rs 1,089 crore for the fourth quarter. Net sales were up 3.36% year on year to Rs 7,809 crore during the quarter under review.

However, Harish Manwani, chairman, HUL, cautioned that development should not be looked at by quarter but viewed as a trend, "And the trend is that rural has slowed down."

Mehta said, "Rural, we had called out a year back because it was very discernable – the slowdown in trend. It has only exacerbated in the recent times. We certainly believe that monsoon should help, especially in areas where the drought is very severe. And also very importantly, the government has recognised the stress in rural that is the reason more spends have been allocated for rural."

"Having said that, from the medium- to long-term perspective, rural is very promising and there is no question about it. The penetration and consumption levels are so low that it will certainly be picking up."

As for strategies to deal with rural slowdown, Mehta said HUL has been increasing the advertising and promotional (A&P) spends. "We have taken the benefit of low commodity prices to invest more behind the categories, markets and brands. And one of the thrusts has been market development in terms of building the categories of the future among other things. This is where we have significantly raised our ante and we believe in years to come we should be harvesting the benefits," said Mehta.

While growth continues to be led by volumes, HUL top executives said that commodity costs have started showing signs of an upturn and this could lead to an increase in prices going forward. However, the management is also of the view that since competitive intensity has increased significantly it may not be very easy to hike prices.

According to P B Balaji, CFO, HUL, the two big commodities that impact the business are crude and vegetable oils. Crude has bounced back from $30-odd and is currently at $40-45. "While is still below the levels it was last year same time, where will it go is anybody's guess. Vegetable oil has had a pretty sharp turn and is up by almost 50% over what the prices were towards the end of December 2015," he said.

While there is a clear pick-up in the commodity costs, HUL will continue to focus on driving volume-led growth with an improvement in operating margin. "From our point of view, we always look at all lines of profit and loss account when we manage cost increases. And to that extent how are we going to manage those cost increases is something we have demonstrated time and again in the past. While there will be some residual that will flow on to the price, there are two things we always look at when we manage costs. How to pass value on to the consumers in the right way and how do you stay competitive," said Balaji.