HUL: India must ensure it doesn’t get entrapped by stagflation: HUL MD Sanjiv Mehta
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Stagflation refers to a recession-inflation situation in which the inflation rate is high, the economic growth rate slows, and where unemployment remains steadily high.
“Inflation is certainly having an impact on consumption, and we must ensure that we do not get entrapped by stagflation. It would be a tightrope walk for the Reserve Bank (of India). They will have to ensure that there is sufficient liquidity, and growth is not constrained, but at the same time there is no runaway inflation,” Mehta said.
Even before the Russia-Ukraine conflict, private consumption and private capital expenditure needed improvement and both are, to an extent, interlinked, he added.
“Until this happens, the government would have to play the prime mover of fuelling growth in the economy,” Mehta said.
HUL, the country’s biggest consumer goods company, posted a 10% growth in sales driven by price increases as growth in volumes – or the products consumers actually buy – remained flat.
The maker of Rin and Dove brand soaps, however, outpaced the overall fast-moving consumer goods (FMCG) market, which expanded 1% in value, while volumes fell 8%.
HUL’s performance is considered a proxy for the broader consumer sentiment in India.
The company blamed the overall market slowdown on rising prices across categories.
“For most Indians, incomes are limited. Add to that price increases, not just in packaged FMCG, but in a gamut of things including fuel, edible oils, and grains. As a result, funds in the households meant for spending on packaged FMCG often get reduced and consumers titrate volumes by reducing the quantum of consumption or in many cases opt for low-unit price packs,” Mehta said.
Prices of crude and palm oil, key ingredients for soaps, shampoos and detergents, have risen 60% during the quarter from a year ago and net material inflation has grown over four times in the past two years.
As a result, HUL’s gross margins fell 331 basis points (bps) during the quarter, with net material inflation during the January-March period about 4.5 times the June 2020 quarter level, indicating that pricing growth had not caught up as much.
A basis point is one-hundredth of a percentage point.
Consumer-products makers including HUL have been increasing prices to offset the rising cost of energy, packaging and transport. With Russia’s invasion of Ukraine further stoking commodity and supply chain prices, HUL said it expects softening of commodity prices when the Ukraine crisis gets resolved.
The company, which has historically shied away from giving profit guidance, warned that margins would be under pressure in the near term.
“We have a very strong business model with a 25% Ebitda margin, but it doesn’t mean it will always grow in a linear fashion. During this period of high inflation, it is likely that margins may dip. However, we also remain confident that we will be able to recover our margins going forward,” Mehta said.
Despite high commodity inflation and pressure on rural demand, analysts said HUL was able to sustain volumes and operating margins through lower advertising spending and calibrated price hikes.
However, rising crude and palm oil prices would continue to keep margins under check and the company would still require price hikes to protect margins in the near term, they said.
“Rural volumes have taken a hit due to downtrading in such an inflationary scenario. Moreover, FMCG companies would require to increase ad spending to previous levels to support new products and categories. Though we believe HUL is best placed within the FMCG industry to face these challenging scenarios, the next few quarters would see continued volume as well as margin pressure,” ICICI Securities wrote in a recent investor note.
Downtrading refers to consumers buying either cheaper products, smaller packs, or delaying consumption altogether.
India is Unilever’s second-biggest market after the United States and is one of the top performers, with revenues of €5.6 billion.
Earlier this year, Unilever (HUL’s parent entity) said it would create five distinct businesses – beauty and wellbeing, personal care, home care, nutrition, and ice cream – with each being fully responsible and accountable for its strategy, growth, and profit delivery globally.
HUL said the new structure should bring in greater focus, enhanced agility and speed in decision making for the company with a higher level of accountability for Unilever.
“This should also translate into better and quicker innovations for the Indian business,” Mehta said, adding that HUL’s story is intertwined with India’s growth story.
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