Is It Good Enough?
The consumption bell-weather Hindustan Unilever reported its Q2FY19 results on Friday post-market close. For the quarter ended September 30
th 2018, the company reported 10 percent domestic volume growth beating analyst expectations of 8-9 percent. HUL’s operating margins at 21.9 percent were higher than the CNBC-TV18 Poll of 21.7 percent. Even the reported net profit of `1525 crore was above the CNBC-TV18 Poll of 1452 crore. While there is no doubt that the FMCG major’ quarterly performance was good, it also opens the door for the all-important question, is it good enough? HUL Q2FY19 Results
Revenue +11.1% at 9234 Cr Vs 8309 Cr
EBITDA +20% at 2019 Cr Vs 1682 Cr
EBITDA Margin at 21.9% Vs 20.2%
Net Profit +19.5% at 1525 Cr Vs 1276 Cr
HUL Q2FY19: Results v/s CNBC-TV18 Poll
Revenue at 9234 Cr vs Poll at 9311 Cr
EBITDA at 2019 Cr vs Poll at 2020 Cr
Margins at 21.9% vs Poll at 21.7%
Profit at 1525 Cr vs Poll at 1452 Cr
HUL Q2FY19: Key Positives
Volume growth at 10% vs Poll of 8-9%
th Qtr of double digit volume growth
EBITDA Margins expand by 160 Bps
All segments saw double digit volume growth
HUL Q2FY19: The Fineprint
Revenue: That’s the single most important number while analyzing a consumer company’s results. Any consumer company selling products of acceptable quality at competitive prices with a reasonable leash on overheads will be profitable. The key is to sell and keep at it. Revenue growth is a function of volume & realization/unit. To grow sales, one either sells the same number of units at a higher price or higher number of units at the same price, or ideally a combination of both.
While HUL’s 10 percent volume growth was higher than analysts’ expectations, the company’s revenue growth at 11 percent was slightly below the CNBC-TV18 Poll of 12 percent growth. This implies, price-led growth of ~1 percent was below expectations of 3-4 percent growth. This mild miss on the revenue front did aid the company’s reported EBITDA Margins to 21.9 percent vs Poll of 21.7 percent as the denominator was smaller. The absolute EBITDA at 2019 Cr was totally in-line with analyst expectations of 2020 Cr.
The company attributes this improvement in operational performance to their sharp focus on cost reduction and improving efficiencies. That’s good news, but again, is it good enough? More importantly, is it sustainable?
HUL’s Gross Margins (the measure of revenue over cost of production) have declined by 70 Bps year-on-year and 200 bps sequentially. Inflation in crude oil-related input costs seems to outweigh the lower prices of other non-crude oil related commodities. The pressure of higher Crude-Oil & weaker INR would only increase in the next few quarters as prices of crude-related commodities increase with a lag and contracts are renegotiated. How will this impact on Gross Margins affect the EBITDA Margin, needs to be monitored.
Over the last year, HUL also spent 30ps less on Advertising on every Rs. 100 worth sale. In Q2FY18, HUL spent 12.3 percent of its revenue on advertising and promotions. In Q2FY19 However, this has reduced to 12 percent and that’s aided EBITDA Margin expansion. With many innovations, new launches & increasing competitive intensity, the company may have to ramp up ad spends. There is a risk that margin expansion in future, may not look as wide.
HUL Q2FY19: Management Outlook
Near term Demand outlook looks stable. Crude increase and currency depreciation are the key factors to watch out for.The management will look to focus on volume driven growth and improvement in operating margin.
Price, Price and Price
Hindustan Unilever has delivered double digit volume growth for four straight quarters now. This was aided by a favorable base, recovering demand and increasing consumer spends. The benefit of a low base has now vanished. Demand conditions as per HUL’s management have stabilized. It needs to be monitored if there is room for further improvement in demand sentiment and consumer spending in an environment of Petrol at `90/Ltr and impending Food Inflation due to MSP increase in Rabi crops.
So from here, HUL’s revenue growth and the resultant profit growth will have to be price-led. The management in its post-result briefing did say they would be taking price increases as and when required, but will continue to focus on volume led growth. While volume led growth signifies market expansion, Price Led growth signifies strength in the marketplace. In this environment of increasing input prices, higher price for better products (premiumization), lower disruptions (DeMo, GST, Anti-profiteering) the stage is set for the Soap to Soup giant to showcase some market strength and report price led growth. The question is, will it choose this path?
What needs to be monitored –
Price growth in the next 4 Quarters
Volume growth for the next 4 Quarters will look bleak due to high base
Margin trend over the next 4 Qtrs given competitive intensity & input cost inflation
EBITDA Margin Trend
HUL: Value or Growth?
This brings me to the final question: At 46X FY20e P/E (vs Recent peak of 53X FY20e P/E) is HUL a value stock or a growth stock? The answer to that lies in the path that HUL decides for the next four quarters. It would be difficult for HUL to grow volumes beyond 5-7 percent for the next four quarters given the high base. If the company doesn’t embellish this volume led growth with some price led growth, there will be a risk to margin compression in the current environment and the concomitant profit growth may not exceed far beyond low double-digits to mid-teens, at best. That’s not growth, and at 46X, not even value. If an some-element of price growth could boost the consumer bell-weathers’ profitability, things could look very interesting and attractive.
Would these results lead to long-term investors off-loading HUL from their portfolio? Most definitely no. It is the bluest of the blue-chip investment that has created immense wealth for shareholders in the long-term.
However, for those on the sidelines waiting to buy, HUL’s iconic character, ‘Lalitaji’, the no-nonsense, smart, independent, prudent homemaker, who is conscious of her budget and yet will never compromise on the quality of products that she buys would say “Intezaar karke kharidari, Main Hi Samajdari Hai!"