HUL highlights slowing demand in urban markets, bets on rural relief

MUMBAI/NEW DELHI: India’s largest home furnishings company Hindustan Unilever Ltd (HUL) on Wednesday highlighted a slowdown in urban markets, especially in big cities, echoing demand deceleration at rival Nestle SA in big cities.

However, the maker of Vim energy bars and Pond range of personal care products remains optimistic about the rural market, which is showing signs of gradual improvement.

“Urban growth is on a downward trend, especially in large cities, which have been the engine of FMCG growth for a long time,” HUL CEO and Managing Director Rohit Jawa said in a press release. We are observing slower growth across channels and segments,” the company said on Wednesday after its second-quarter results missed analysts’ expectations for revenue and profit.

Management attributed the slowdown in urban market demand to higher food inflation and the statistical impact of a high base in the same period last year.

Meanwhile, growth in the rural fast-moving consumer goods (FMCG) market is picking up steadily.

“Rural growth is gradually coming back and is currently outpacing urban growth for at least a few quarters and even this quarter. Rural areas are growing steadily, although it is not a huge change. The trend is positive. Favorable weather, good monsoon The positive results for kharif crops bodes well for rural demand,” Jawa said. “Rural growth is critical as it accounts for about a third of our business and is also significant to the wider economy as a large proportion of India’s population lives there.”

Overall growth has been “tepid” and will remain so in the short term, while in the longer term rural areas will outpace urban areas.

HUL’s financial results are seen as a proxy for broader Indian consumer sentiment.

The company reported a 3.86% year-over-year decline in September quarter profit. Net profit for the quarter was $2,612 crore, compared to Rs. $2,717 crore a year ago.

Sales increased by 1.51% $15,508 Crores Rs. $15,276 crore a year ago. Quarterly earnings included a one-time credit resulting from the favorable resolution of a past indirect tax litigation.

A Bloomberg survey of analysts showed HUL’s standalone revenue was $15,790 Crore and Net Profit of Rs. $26.8 billion rupees.

The company reported underlying sales growth of 3% for the quarter, down sequentially but up year-over-year. In the same quarter last year, the company’s sales grew 2%.

Jawa said growth in high-priced products continues to outpace mass and mass-priced products, indicating pressure on middle-income households.

“The high-end market is growing faster and the domestic upgrade journey continues resolutely. We have to focus on the long-term opportunities here as per capita consumption in India remains low and there are plenty of growth opportunities,” he said.

HUL has been pushing the premuimization (selling higher quality, higher priced goods) agenda and launched more premium products on the retail shelves this quarter with brands like Tresemme hair care products and Comfort fabric cleaner.

Company announces interim dividend $19 yuan per share and special dividend $10.

On September 6, the board of directors appointed an independent committee to assess the prospects of the company’s ice cream business after parent company Unilever decided to spin off the business vertical. The company said in a separate filing on Wednesday that its board of directors had announced its decision to separate the ice cream business based on recommendations from an independent committee.

Ice-cream, which accounts for 3% of HUL’s revenue, is a high-growth category that requires significant investment to realize its full potential, the company said.

“There are two models of separation: we can sell the business, or we can spin it off and list it publicly. Both options are being assessed. An independent committee has been appointed to assess the best way forward, with the primary objective of maximizing shareholder value and maximizing Minimize business disruption. By the end of this year, we expect to have clarity on which route to take,” said Ritesh Tiwari, the company’s chief financial officer.

Meanwhile, the company has been forced to increase prices on packaged tea and skin cleansing products after a period of healthy commodity cost growth. This quarter, year-on-year inflation for palm oil and tea was 10% and 25% respectively.

Management said the company has begun adjusting price increases to balance “inflationary costs with competitive pricing.” “Overall, there are two or three commodities that have impacted Hindustan Unilever – crude oil, palm oil and tea. Crude oil prices are lagging at the moment… but we are seeing palm oil up 10% year-on-year and tea up year-on-year 25%. In the December quarter, you will see price increases for skin cleansing and tea. These increases will be implemented in phases before making a final decision on price adjustments. In this regard, our price increase in December will ensure that overall value growth is ahead of volume growth,” Tiwari said.

The company also cut advertising and promotion spending during the quarter, which fell 14.8% year over year, in line with “overall market conditions.”

During the quarter, the company’s home care business grew 8% with high-single-digit volume growth. Fabric laundry and home care products both posted high-single-digit sales growth, with growth broad-based. Food and refreshments were a drag, with sales down by single digits. Beauty and wellness grew 7%.

HUL said it will continue to promote premiumization, reshape its product portfolio in high-growth areas, and lead future channels.