The December quarter results of HUL indicate that the recovery from the pandemic-induced slowdown is firmly in place. Domestic volumes grew by 4 per cent (excluding recently merged GSK Consumer and VWash) in the October-December 2020 period, a steady progress from the 7 per cent fall in volumes each of the three months ended March 2020 and June 2020 and the 1 per cent growth in the September quarter.
This was aided by broader participation from its business segments. Unlike the last two quarters, discretionary segments have picked-up well in the third quarter indicating a comeback in urban demand.
While FMCG players with a larger ‘foods’ (essentials) portfolio did well during the March and June quarters, HUL lost out due in these periods due to the tilt in product mix towards more discretionary segments such as beauty & personal care (about 40 per cent of total revenues) and home care products (30 per cent of total revenues). However, beauty &personal care has bounced back well in the third quarter with a 13 per cent year-on-year growth in revenues, as against the contraction seen earlier.
Even as the home cleaning segment (Domex, Vim) did well, fabric wash products had pulled down the numbers for the homecare segment until September. This segment has started showing a pick-up now. During the quarter, HUL launched premium fabric care products such as Lifebuoy Laundry Sanitizer (anti-germ post wash liquid) and Surf Excel Smart Spray (fabric stain remover).
Ad spends rise
Another green signal is that the company’s advertising spends are back to the usual levels of 11-12 per cent of sales. From a sharp decrease to 7.65 per cent of sales in the June quarter, ad expenses have moved up to 11.9 per cent now, and is at the same level as the year ago period. With the personal care category recovering, HUL has also been able pass on palm oil price increases.
Towards this, HUL took a price hike of 2.5 per cent in some premium soap categories ( as against a requirement of 7-9 per cent ) during the quarter. Another 2.5 per cent hike is on the cards. The company was able to pass on price rise in tea ( foods & refreshements category) in the September quarter itself.
So far, so good. But it is to be noted that volumes are yet to go back to pre-Covid levels. The 4 per cent volume growth now is still lower than the 5 per cent levels achieved during the 2019 consumption slowdown. The best times in recent years for HUL was the five quarters from December 2017 to December 2018 where volumes grew in early double digits.
The stock has corrected about 9 per cent from the one-year high of ₹2,614 touched in April last year. With demand coming back across all segments, the stock may see better days ahead. However, rich valuation may restrict the upside. It trades at about 80 times its trailing 12-month earnings and 68 times its estimated (Bloomberg consensus) earnings for FY21.