Q1 comment: Limited foods portfolio hurts HUL

Ever since the pandemic broke out, the foods segment has been the main driver of growth for FMCG companies. The June 2020 quarter volume growth of Britannia which came in at 22 per cent, is testimony to this. However, HUL which usually derives about 40-45 per cent of its revenues from the more discretionary beauty & personal care segment has somewhat missed the bus, with overall volumes falling by 7 per cent (excluding GSK Consumer) over the June 2019 quarter.

The fall could have been sharper but for the pick-up seen in some products such as Domex floor cleaners and the Lifebuoy portfolio led by hand wash and sanitisers. The nutrition business led by Horlicks which became part of HUL since April 1, 2020 saved the day for the FMCG giant too, with this business showing a volume growth of 5 per cent in this quarter over the same period last year. During the quarter, HUL introduced Horlicks with added zinc to boost immunity.

Merger helps margins

Thanks to the merger, the contribution of the foods segment to overall revenues has moved up from 20 per cent levels to 28 per cent and segmental revenues saw a 50 per cent growth year-on –year. While other segments such as home and personal care saw a dip in segment margins, food margins remained steady, thanks to the higher margin profile of GSK’s nutrition business.

This factor helped contain the fall in the operating margins for HUL to the extent of 60 basis points. After accounting for this benefit, operating margins for the quarter came in at 25 per cent, compared with 26.1 per cent a year ago. Despite sharply cutting advertising spends to 7.6 per cent of sales (11.6 per cent in June 2019 quarter) and control over merger expenses, weak top line growth and higher input costs (vegetable oil, milk powder, tea) were dampeners.

Outlook

With localised lockdowns continuing, foods and essentials category may continue to do well in the near term for FMCG companies. HUL seems to be a bit on the back foot on this front, in comparison with companies with large food portfolios such as Britannia or Nestle. As a sliver lining, the company is seeing some pick up in hair care products – more from the personal hygiene space such as shampoos rather than hair colours which are discretionary in nature. Ditto with colour cosmetics, skin care and deodorants that are more discretionary and yet to see good offtakes.

The HUL stock has been on correction mode since it touched its one-year high of ₹2,614 in early April 2020, losing by about 12 per cent since. Even then, it trades at a pricey valuation of over 75 times its trailing twelve month earnings. The company is still unable to judge demand at the consumer level, although its distribution pipelines have got back to normal levels in June. Unless prospects for volume growth improve, the upside will be limited for the stock.

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