Rural demand lifts Hindustan Unilever net 9% in Q3

Fast moving consumer goods (FMCG) major Hindustan Unilever Ltd (HUL) on Thursday reported a 9% growth in net profit at Rs 1,444 crore in October-December 2018 quarter, in line with street estimates, on the back of robust rural demand.

Going forward, demand will remain stable despite national and international macroeconomic factors like crude and currency among others, the company officials said.

Sanjiv Mehta, chairman and managing director, HUL, said rural growth was about 1.3 times the urban during the quarter. "If we look at total market/ demand perspective the value growth of the market has been about 9% to 10% and the volume has been 8% to 9%. Within this, rural has been growing at a faster pace than urban. It continues to be a very dynamic environment, and there are many factors like total agri production, realisation, money that government spends on various schemes, rural wages etc. that impact the rural demand. While the scope in India is immense we can only hope that the momentum continues," said Mehta that the outlook is difficult to predict though it is certain that the demand scenario will continue to be stable.

The company's profit after tax before exceptional items (PATbei) at Rs 1,401 crore was up 17%. Exceptional items during the quarter included restructuring expenses of Rs 46 crore and acquisition and disposal related costs of Rs 16 crore.

Domestic consumer growth for the third quarter of fiscal 2019 stood at 13% while underlying volume growth was at 10%. While home-care segment grew 16%, beauty and personal care rose 12% on the back of premiumisation. Foods and refreshments category grew about 9%, excluding the turnover from Adityaa Milk ice cream business.

According to Srinivas Phatak, chief financial officer, HUL, the growth came on a strong comparative year-ago period, which had a double-digit volume growth. Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 2,046 crore was up 22%, while Ebitda margin was up 170 basis points (bps). "Mixed improvement and operating leverage has given us the benefit of margin expansion," said Phatak.

From a domestic demand scenario point of view, HUL top management said that there is a fair amount of activity, including elections, potential disruptions and other elements that will have to be closely watched over the next three to four months.

"The quarter witnessed significant volatility in terms of crude and currency. While at one stage, crude was at $85 per barrel and it went down to $50 and is now back to $60, so there's a fair amount of volatility. While demand is stable on a base level, it will be crucial to keep a close eye on all these emerging elements and manage the business with agility," Phatak said, adding all the externalities were well managed to deliver a strong volume-led growth.

Abneesh Roy, senior vice-president - institutional equities - research, Edelweiss Securities, said, "The 10% YoY volume spurt translates to stellar 10.5% two years' average growth – highest over past 27 quarters, 7% in Q2FY19 and 6.1% in Q1FY19. This further reinforces our optimism on volume off take for strong consumer staples companies. In spite of raw material price volatility, HUL's gross margin fell only 30bps YoY. Ebitda margin, however, expanded 168 bps YoY aided by 93 bps and 148 bps YoY savings in ad spends and other expenses, respectively."

Roy expects volume and earnings growth to remain robust led by election-related sops, government's around Rs 61,000 crore NREGS spends, acquisition of GSK Consumer, company-led initiatives and new launches.

The company is also restructuring its water business and plans to gradually phase out its gravity segment water purifiers. That's because demand is shifting towards RO and UV and their combinations while the gravity segment is de-growing.

"Water is an important business for us, and on an overall basis, we continue to be committed in this category. The demand is significant in the RO/UV segment and we will be focussing on participating in the emerging and new opportunity offered by this mid segment and upwards. We will gradually phase-out products in the bottom-end or the gravity segment," said Phatak, adding that the phase-out will be completed over the next couple of quarters and the after-sales support will be made available for two more years.

On the activation and innovation front, HUL launched the Magnum Hazelnut and has started to introduce Rexona antiperspirant on a test basis.

Roy of Edelweiss said, "We envisage HUL to be a key beneficiary of rural recovery and herbal push, and estimate strong volume growth to sustain. With return of price hikes and premiumisation, we expect strong earnings growth. As we roll forward, we arrive at a target price of Rs 2,020 a piece. At current market price, the stock is trading at 49.8x fiscal 2020 estimated earnings per share."