FMCG analysts believe that HUL's breaking consistent band of 5-6 per cent growth in past eight quarters is due to realignment of channel spends and a general slowdown in rural demand. However, shares of the FMCG major jumped over 2 per cent intraday on Tuesday. Though a bit cautious, most analysts are bullish on the stock but concerns over rural demand and monsoon still persist.
Hindustan Unilever Ltd’s (HUL’s) volume growth has been stuck in the 6-7 per cent range for four quarters. In the March quarter, though, it dropped to 4 per cent. If value sales growth had slowed too, the forecast would have been dire. Instead, its domestic business’s sales growth improved to 3.5 per cent from 2.9 per cent in the preceding quarter.
According to one of the big four firm, HUL's Q4 performance reflects the struggle in staples – price deflation or low price growth has a flow-through effect on profit growth at a time of lower volume growth in the industry. It disagrees to the belief that price deflation has bottomed and that we are at the beginning of inflation-led revenue growth for HUL in FY2017. It expects HUL to moderate ad spends in FY2017 to manage EBITDA margins, in an environment of relatively lower competitive intensity from regional/smaller players. Considering the earnings miss and the cautious outlook on rural consumption, it has lowered FY16-18 earnings by 2-5 per cent.
CLSA still holds a underperform rating with a reduced target of Rs 800 per share stating that deceleration in volume growth is a worrisome trend. It has cut earnings per share (EPS) by 2-3 per cent over FY17-18. It warns that a gradual uptick in input prices along with a muted near-term demand trend still poses downside risk. It also feels that revenue growth may get some support from a rise in input prices though we are concerned about revised forecast of 9 percent revenue growth in FY17. IDFC maintains its underperform rating with a concern that with rural growth not seeing a revival as yet, volume growth challenges will persist at least in the near term.
It has reduced FY17 earnings by 3 per cent and FY18 earnings by 4 per cent to factor in weak performance across core segments. HUL posted net profit at Rs 1090 crore in January-March quarter, up 7 per cent from Rs 1018 crore in corresponding quarter last fiscal. Total revenue in Q4 rose 3.5 per cent at Rs 7945 crore against Rs 7675 crore in year-ago period. However, volume growth of 4 percent (YoY) in the quarter was disapointing. In Q4, gross margins rose 240 basis points (bps) at 52.6 per cent versus 50.2 per cent YoY. Raw material costs slipped 2.9 per cent at Rs 976 crore but advertising spends increased 6.3 per cent at Rs 1090 crore.
