India’s bellwether in the fast-moving consumer goods sector is expected to report a 6% year-on-year (YoY) growth in net profit to Rs 2,653 crore, on the back of a moderate 1% growth in revenue to Rs 15,378 crore, the average of estimates given by 13 brokerages showed.
Sequentially, the bottomline is seen falling 2.4%, while the topline growing at a moderate 0.7%.
The ‘Lux’ soapmaker is scheduled to release its earnings for the third quarter on Friday.
Uneven rainfall, a warmer-than-expected winter, and subdued rural demand despite an extended festival season affected volume growth in the quarter gone by.
As a result, HUL is widely expected to report a mere 2% growth in volumes in the December quarter on a base of 5%. This will be similar to that seen in the September quarter and would be the slowest growth that the FMCG major has seen in five quarters.
“Volume growth is likely to remain anaemic on no material change in discretionary demand despite a festive quarter. Pricing has also started being in the negative zone, pulling down overall value growth,” Nomura Financial said in its note. Price cuts in the mainstay soaps category are also likely to weigh on the topline. The overall prices in the soaps category is likely to have fallen 2% YoY, according to Kotak Institutional Equities.
Nuvama Institutional Equities anticipates the urban market to outpace the rural, which may see HUL’s premium segment doing better than the mass end. However, urban may not overshadow rural completely, given that the latter makes for more than half of the volume growth for FMCG players such as HUL.
Besides a moderate topline growth and subdued volumes, the operational performance of HUL is also expected to be constrained by a rise in raw material costs amid the geopolitical tensions between Israel-Hamas, and price cuts taken by the company in some of the key categories in the last quarter.
Earnings before interest, taxes, depreciation and amortisation or EBITDA is likely to rise nearly 4% YoY to Rs 3,672 crore but fall by around 1% sequentially.
“We forecast EBITDA margins to expand 50 bps YoY, but gross and EBITDA margins to fall slightly QoQ, due to an initial spike in commodity costs due to the Israel-Hamas crisis impacting crude oil prices,” Nuvama Institutional Equities said.
Further, higher advertising spends and an increase in the royalty payment to parent Unilever Plc will also weigh on margins, said analysts.
In the September quarter, advertising expenses shot up 420 basis points YoY.
There will be a 45 bps increase in royalty, an increase in advertising spends to 11.4% of sales compared to 7.9% a year ago, and some impact of discontinuation of distribution of OTC products of GlaxoSmithKline Consumer, Kotak Equities said.
Key Monitorables
Rural consumption is critical for FMCG players, and, therefore, comments on demand trends in this segment will be closely monitored by analysts.
HUL’s pricing strategy and raw material pricing trends will also be eyed as this would help gauge margin performance for the ensuing quarters. Analysts will also track the company’s guidance on advertising spends in the coming quarters.
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