As commodity prices flared, fast-moving consumer goods companies raised prices during the quarter. HUL raised prices across categories such as skin cleaning, shampoos and home care products, even as the company saw a strong uptake for its ice creams and fabric-cleaning products.
The company reported a standalone June quarter profit of ₹2,289 crore against ₹2,207 crore estimated in a Bloomberg survey of analysts. The maker of Surf Excel detergent and Dove soaps reported a 6% volume growth during the quarter, albeit on a low base. In the March quarter, its volume growth was virtually unchanged.
The numbers come at a time industry volume declined 5% in the June quarter, the company said in its earnings presentation, citing market data.
The operating environment remains challenging, marked by unprecedented inflation, which has hit consumption, HUL said. “Markets, especially from the lens of volume (growth), they still remain soft," Sanjiv Mehta, CEO and managing director, said after the earnings announcement, adding inflation is still very much a concern.
Revenue for the quarter rose 19.7% from a year ago to ₹14,272 crore; the company continued to take “calibrated" price hikes during the quarter to counter high raw material prices. The company’s gross margin contracted by 309 basis points from a year ago. Advertising and promotion expenses grew by 29.7% year-on-year during the quarter.
Steep inflation is likely to hurt both margins and consumer demand in the near term, top company executives said, adding September quarter margins will remain “under pressure" and may improve sequentially only from the December quarter, despite the recent softening in commodity prices. HUL said it would continue to extensively boost savings and take calibrated pricing actions.
“Looking ahead in the near term, growth will be price-led as inflation continues to impact consumption. Most commodities have further inflated in the June quarter and continue to remain at very high levels. This, along with the consumption of higher-cost pipeline inventory, will result in our September quarter margins remaining under pressure. If the recent softening of commodity stays, it will positively impact our sequential margins from the December quarter," chief financial officer Ritesh Tiwari said in a media call.
A weakening rupee could pose a challenge, despite the recent correction in some commodities, such as palm oil. During the quarter, HUL took a 12% price hike as commodities such as crude and palm oil remained elevated.
The company remains focused on gaining consumer franchise or market share while protecting its business.
“We have grown competitively whilst protecting our business model by maintaining margins in a healthy range. While there are near-term concerns on inflation, the recent softening of commodities, forecast of a normal monsoon, and monetary and fiscal measures taken by the government augur well for the industry," Mehta said.
During the quarter, the company’s home care segment saw a growth of 30%, whereas beauty and personal care grew 17.3%. Both these segments saw aggressive price hikes, said analysts. “Calibrated price increases were taken across fabric wash and household care portfolios as input costs continue to inflate at significantly high levels," the company said. The beauty and personal care category reported a “broad based" growth. The company’s food and refreshment portfolio grew by 9%.
To be sure, consumer staple firms faced a challenging operating environment in the June quarter, given weak rural demand and compounded by high input cost inflation; crude oil and food inflation continued to be steep. This further impacted purchasing power. HUL said urban markets outperformed rural areas.
Analysts said HUL’s earnings were above estimates on the revenue front and in line with estimates on the operating profit and earnings front.
“High commodity inflation in most parts of the quarter resulted in contraction of both gross margins as well as operating margins. However, we believe palm oil prices dipped significantly from the highs in Mid-June. This would ease the pressure, given the company has taken 10-15% price hikes in the last year to pass on this inflation. Further, volume growth in H2FY22 would be aided by price cuts in terms of restoration of grammage in smaller packs," analysts at ICICI Securities said.
Meanwhile, Mehta said inflation needs to temper down globally for volumes of daily goods to pick up. “One way for volume to grow is that the economy grows. Economic growth means more money in the hands of more people. The second is commodity prices start cooling so that they (consumers) have less stress on the wallet and can consume more products. That’s where the volume will start going up," he said.
Citing IMF estimates, Mehta said that if the Indian economy grows at the 7% kind of level as forecast, that should augur very well for the country. “And they (India) should then be able to navigate this huge crisis," he added.
