Hindustan Unilever Limited (HUL) will prioritise volume growth over margin as it is determined to not lose market share to other competitors and new entrants. Its intent to raise advertising and promotion spend is also geared towards dealing with ‘competitive intensity.’

However, the company is struggling with volumes as rural markets have still not recovered, though there has been an improvement sequentially. The company’s underlying volume growth in FY23 at 5 per cent was below analyst expectations. Volume growth in the March quarter at 4 per cent and lower than the December quarter also disappointed the market.

In FY23, the company’s EBITDA margin contracted to 23.4 per cent from 24.8 per cent year ago.

Price cuts

The pricing growth also did not play out as expected.

ICICI Direct Research noted HUL has taken price cuts (through grammage increases) and ad spends have risen but volumes have still been feeble. If it wants to raise volumes further, the company will have to initiate more price cuts, especially as now there is a very determined, deep-pocketed player, Reliance Retail Ventures, which has entered the fray.

During the analyst call, the management also indicated that there could be calibrated price cuts to balance the price-value equation. In fact, it has already taken price cuts in the detergent segment in April. This will likely lead to lower revenue growth, at least in the current quarter.

Sequential slowdown

The home care segment saw the sharpest sequential slowdown in Q4, compared to its growth in the nine months of FY23. So did the laundry segment, while the food and refreshments categories saw weak growth. The company pointed out that due to inflation, there was a downtrading to loose tea and smaller regional players becoming more active.

Major brokers have a ‘buy,’ ‘accumulate’, and ‘hold’ rating on the stock as they wait to see how the company plans to tackle the challenges ahead, especially the competition snapping at its heels.

Related Topics