HUL may find it hard to post strong Q2 growth

ET Intelligence Group: In a quarter affected by the second Covid wave, India’s leading FMCG company Hindustan Unilever managed a reasonable performance in comparison with the year-ago period. Volumes expanded 9%, net sales rose 13% and profit increased 10% aided by the low base effect.But sequentially, the company's June quarter reflects the adverse impact of the second wave. While April started off well, May turned out to be the toughest month, fraught with challenges to do business due to restrictions. June saw a gradual recovery in sales.Rural demand continued to be strong and higher than that seen in urban India. Although health & hygiene categories did well and sales of categories such as skin care products and colour cosmetics recovered with improved mobility; yet certain discretionary categories such as ice cream, food solutions and vending remained adversely impacted. The home care and food and refreshment segments posted low single-digit growth in profit.84664481Input cost inflation (driven by rising prices of palm oil, tea, and crude oil) was too high for the company to completely pass on the increase to consumers. Raw material costs rose by a sixth, and were higher than the 13% growth in net sales. Even as the company took selective price increases, operating margin contracted 110 bps to 24.3%. Advertising spend, while being 28% higher year on year, has dropped by similar proportions sequentially. By contrast, other expenses have increased in absolute terms both sequentially and from the year-ago level.After the initial excitement that pushed the stock up 3% soon after the results were announced, the HUL stock closed 2.3% lower for the day as the Street looked at booking profits in a bullish market. The HUL stock is 6% lower than its record high level and is trading at a premium valuation of 70 PE. While the management commentary was positive, the outlook on demand recovery has been cautiously optimistic. Improvement in mobility shall determine the performance of the discretionary portfolio that constitutes around 12% of the company’s revenues.A good monsoon holds the key for the growth momentum in rural demand to sustain. Also, the overall strength and resilience of consumer demand will determine the quantum of price increases taken by HUL to pass on the input cost inflation, if any.Despite performance recovery, it may become difficult for HUL to post very strong growth for the second quarter over the healthy base of the September quarter last fiscal.

from Economic Times https://ift.tt/2UvvJQ5