HUL expects near-term demand scenario to remain subdued

Fast-moving consumer goods (FMCG) major Hindustan Unilever Ltd (HUL), which reported a 15% growth in profit after tax (PAT) at Rs 1,755 crore in the June quarter of fiscal 2019-20, said there is a further moderation in the marketplace compared to the preceding quarter. And while the rural market was earlier growing ahead of urban, it has now slowed down and is now at par with urban.

Outlining the reasons for the rural slowdown, Sanjiv Mehta, chairman and managing director, HUL, said that food inflation has been very tepid. "The rural wages, if you look at it over the last five years, have been modest. These would be the primary contributing factors as to why there has been a slowdown in the growth," said Mehta, adding that the urban market has also slowed down but continues to be the larger part of the total consumption basket.

The urban slowdown, according to Mehta, is also linked with the slowdown in the country's gross domestic product (GDP). "That's the reason I think, there is a linkage to FMCG growth and the state of the economy," he said.

The rural market, according to HUL management, is growing but the pace is not the same as was witnessed a few quarters ago. "Rural, which used to grow at 1.2 to 1.3 times urban, during the (June) quarter, rural and urban growths were at par. Additionally, crude and currency continue to be volatile," said Srinivas Phatak, chief financial officer, HUL. He added that the company management expects the near-term demand scenario to remain subdued given the overall macroeconomic conditions.

HUL's total sales and domestic consumer business grew by 7% year-on-year at Rs 9,984 crore in the quarter ended June 30, and underlying volume growth for the same period was recorded at 5%. Earnings before interest, tax, depreciation and amortisation (ebitda) at Rs 2,647 crore was up by 18% -- 13% on a comparable basis after adjusting for accounting impact of Ind AS 116. Profit after tax before exceptional item (PAT bei) at Rs 1,751 crore, increased by 12% year on year.

Commenting on the volume growth scenario, Mehta said, the 5% volume growth, though lower compared to what was witnessed in the previous year, was still a decent number for the company. On the overall market scenario, he said that while there is a slowdown, rural has not stopped growing. "But from a perspective of the potential to grow, it has the potential to provide a much faster rate because the penetration/consumption levels are very low," he said.

In terms of how much is modern trade contributing to HUL's total sales, Mehta said that it is still small at 15% but growing at a faster rate than general trade. "However, if compared with the second half of 2018 when it was very robust, the growth rate in modern trade has come down but it is still in the double digits. While all distribution channels are witnessing growth, the rates for each are different. And when the business is growing at 7%, it cannot so happen that the big (distribution) channels are not growing. The math won't stack up," he said.

The canteen stores department (CSD), however, has become an erratic channel. "It is really difficult to take a pattern out of this for various reasons. In the quarter gone by though, we have had good growth. But if you have to see in the longer term, we have seen good growth in some quarters and modest in other quarters," said Phatak.