Market

Hindustan Unilever Rating ‘Buy’; Slowdown in FMCG market has worsened

Inflation denting sales; RM costs and adverse mix likely to keep margins under pressure in Q4; Buy retained with TP of Rs 2520

Our industry interactions indicate the FMCG market has seen a further slowdown, with industry reports pointing to flat revenues and a high-single digit volume decline in Jan/Feb. Inflation is denting consumer offtake, more in rural but also in urban. Home care is holding relatively better c.f. BPC. Input prices have increased further q-o-q, led by palm and crude. While HUL has taken price hikes, RM inflation and adverse mix would keep margins under pressure in Q4.

Industry slowdown: FMCG market growth for categories where HUL operates has slowed down further, from mid-single digit value growth in the December quarter to flat y-o-y in Jan/Feb-22. Volume trends are even weaker. Both urban and rural markets have been under pressure. Slowdown is visible even on a 2-year Cagr in the last few months. Consumers have cut down on volumes, as inflation hits disposable income. Slowdown is sharper at the bottom-of-the-pyramid, both in rural and urban. However, the weakness in urban has been partly masked by good growth at the premium end. While consumers are not down-trading to lower-priced brands, there is a visible shift to smaller pack sizes.

Category-wise performance: Beauty categories such as hair care and skin care have seen a sharper decline, even as home care categories have done relatively better. Market growth in nutrition has remained sluggish even in Jan/Feb.

Input inflation intensifying: Inflationary pressure in key raw materials remains elevated and there has been a high degree of volatility as well. RM prices have increased further q-o-q, led by commodities such as palm, crude oil and packaging materials. The impact of the Ukraine crisis and recent lockdowns in China on RM prices will however flow through fully only in the next quarter. RM inflation is now also seen in foods. Notably, prices have jumped for coffee, SMP, Barley, etc. HUL has taken further price hikes in skin cleansing, household care, laundry, hair care, coffee, etc.

Margins under pressure: Apart from sustained inflation in raw materials on a sequential basis, category mix for HUL is also likely to be adverse as home care performance has been better compared to beauty & personal care. This would mean further margin pressure, both y-o-y and on a sequential basis. Maintain Buy.



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