India’s largest fast-moving consumer goods (FMCG) company Hindustan Unilever Ltd’s (HUL) continues to struggle with muted volume growth as its underlying volume growth stood at 3 per cent compared to market expectations of 5 per cent.
The company’s revenue grew by only 1.9 per cent year-on-year (YoY) to Rs 15,319 crore due to a weaker performance in the Personal Care Segment, which was impacted by price actions and a decline in the Foods and Refreshment (F&R) category, where volumes slipped to low single digits.
Personal care and F&R segments saw a revenue decline of 5 per cent and 1 per cent, respectively, while home care and beauty & wellbeing (B&W) grew by 8 per cent and 7 per cent. Volume growth was primarily driven by home care and B&W, while personal care and F&R saw low single-digit volume declines.
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The company’s gross margins declined by 151 bps YoY to 50.4 per cent, primarily due to rising commodity costs and lack of commensurate price hikes. Prices of key commodities like crude palm oil and tea have surged 10 per cent and 25 per cent YoY, respectively.
With the gap between net material inflation and price hikes narrowing, management expects low single-digit price hikes in FY25.
EBITDA decreased by 1.3 per cent YoY to Rs 3,647 crore, with margins contracting by 66 bps YoY to 23.5 per cent, owing to higher staff costs and other expenses. Adjusted profit after tax (PAT) declined by 2 per cent YoY to Rs 2,611 crore.
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Moderation in Urban Demand
While the rural market is seeing a gradual recovery, moderation in urban demand has come as a negative surprise. Similar concerns were raised by other FMCG companies including Nestle and Tata Consumer.
According to analysts, the demand environment is unlikely to see acceleration as the gradual recovery in the rural market is offset by moderation seen in the urban market.
“Going ahead, shape up of urban market trends along with pace of recovery in Personal Care will be key monitorable,” JM Financial Research said in its client note.
“We expect the demand scenario to remain subdued in the near term, but initiatives laid out to drive the recovery in mass and premium ends of the portfolio should aid a gradual recovery,” InCred Equities said in its client note.
“Price hikes in tea and soaps should aid sales growth going ahead,” it added.
The brokerage firm has retained a “Hold” rating on Hindustan Unilever with a lower target price of Rs 2,820 against Rs 2,875 earlier.
Corrective Measures Underway
While the company has been struggling with demand weakness at both ends of its portfolio, it is taking several measures to address the concerns. At the premium end, HUL is launching products across segments under high-growth avenues like face cleansing, sun care, moisturization, serums, body care and masstige categories. The company has launched a series of products under these segments during the quarter. At the mass end, it has increased its focus on driving product superiority led by relaunching brands with new/improved formulations.
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However, the strategy is not enough amid slowing urban demand, prolonged rural recovery, raw material inflation and an increase in competitive intensity.
The company expects demand to improve in coming quarters but the EBITDA margins are expected to remain at the current level.
Brokerage firms have marginally cut their EPS estimates and a few even lowered their price targets on the HUL stock post Q2 results, considering the muted commentary.
Following the Q2 results, shares of HUL tanked nearly six per cent to Rs 2,502 on Thursday. However, the stock witnessed marginal recovery to Rs 2,527 on Friday.
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In the last few quarters, the stock has been an underperformer on the stock market. In the last one year, the stock has moved mere 2 per cent compared to around 26 per cent hike in benchmark Nifty 50 index.
“We cut our FY26 and FY27 EPS by 5-6 percent and retain our HOLD rating on Hindustan Unilever with a lower target price of Rs 2,820 against Rs 2,875 earlier, based on 53x Sep 2026F EPS,” InCred Equities said.
Emkay Global retained 'Buy' on HUL, as it continues to see enhanced business execution. The relatively weaker show in Q2 is a factor of the tough external setting -- inflationary raw material environment and weakness in urban demand.
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"The portfolio (Home Care and Beauty & Wellbeing) that represents 3/5th of the sales and 2/3rd of the EBIT is in good health, with topline growth in a high single-digit and margin expansion,” the brokerage said.
“The inflationary setting has a bearing on performance of the remaining portfolio. The management cautioned about the near-term demand setting, but is optimistic about the long-term opportunity. Factoring in the near-term stress, we reduce FY25-27E earnings 4-5 per cent," it added.
Emkay suggested a revised target price of Rs 3,225 for HUL against Rs 3,400 earlier.
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