News Analysis

Strong rural demand led to double-digit volume growth

Parvatha Vardhini C BL Research Bureau | Updated on January 17, 2019 Published on January 17, 2019

Despite a higher base in the quarter ended December 2017, Hindustan Unilever has put up a strong show in the December 2018 quarter.

With rural demand continuing to outpace urban, HUL has recorded a 10 per cent volume growth in this period. This is the fifth consecutive quarter of double-digit volume growth for the company.

Volumes grow

After recording a zero per cent volume growth in the June 2017 quarter due to the GST transition, HUL’s volumes have grown at 10-12 per cent in each of the quarters beginning December 2017.

As against the 10 per cent volumes growth in the latest quarter, revenues grew at a higher 13 per cent to ₹9,357 crore, aided by price increases and superior product mix.

The topline growth was driven by a good performance by both home care and beauty and personal care segments. These segments, which together bring over 75 per cent of the revenues for the company, saw a 15 per cent and 11 per cent growth in revenues respectively.

Shifting preference to premium products in fabric and personal wash led the growth here.

Margin expansion

Raw material, as a percentage of sales, stood at 48.4 per cent as against 47.5 per cent. But the company was able to expand its margins by partially passing on the increases and by reigning in advertising spends.

Ad expenses, as a percentage of sales, came in at 12.6 per cent in the quarter as against 13.3 per cent a year ago. Thanks to these measures, operating margin expanded by 190 basis points over the three months ended December 2017 to 21.4 per cent now.

Thus, despite a sharp rise in taxes and a fall in other income, the good operational performance helped net profits grow by 9 per cent to ₹1,444 crore.

Outlook

Though the base effect for volumes may begin catching up in the quarters to come, the company expects demand to continue to be stable in the near term.

Even if rural demand were to be moderate, increasing preference of the urban consumer for premium and natural products may keep the volumes coming.

Preference for defensive FMCG stocks in the market volatility in the last one year coupled with strong demand has seen the HUL stock gain 26 per cent in this period. But this has led to the stock’s valuation expanding sharply to 65 times its trailing earnings now, higher than its historical 3-year average of 53 times.

With the stock perched on a high valuation, the upside may not be high from hereon. Nevertheless, with long-term prospects remaining sanguine, corrections due to market volatility may create buying opportunities.

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