HUL: Is another weak quarter a cause of panic for investors?

This growth was primarily driven by the home care business, which experienced mid-single digit growth, while the beauty & personal care (BPC) and foods & refreshment segments remained stagnant.

Overall, competition from smaller players continues to be a problem. While the premium portfolio is doing relatively better, that’s not enough going by the 1% year-on-year decrease in Q4 Ebitda (earnings before interest, tax, depreciation and amortization) to ₹3,435 crore. According to the investor presentation, the market share metric has worsened sequentially, with less than 60% of the company’s businesses now gaining share.

For the second consecutive quarter, HUL’s pricing or realization was lower year-on-year in Q4 on the back of product price cuts. As a result, total operating revenue for Q4 remained flat year-on-year at ₹14,857 crore. The biggest let-down was a 2.7% decline in BPC revenue to ₹5,050 crore, exacerbated by an astonishing 10% drop in personal care revenue. What gives?

The skin cleansing portfolio suffered due to price cuts and a drop in volumes in the mass and popular segments. Here, HUL is taking steps like correcting the price-value equation in mass and popular segments. Meanwhile, the home care business was also adversely impacted by price cuts, achieving only a 1.4% revenue growth. Revenue from food & refreshment grew by 3%, helped by pricing.

The improvement in gross margin remains a bright spot. In Q4, gross margin expanded by 316 basis points year-on-year to 51.9%. However, the Ebitda margin slightly contracted by 19 basis points to 23.1% due to higher advertising and promotion expenses and increased staff costs. For the fiscal year 2024, margin trends are similar, with a significant expansion in gross margin and a much smaller increase in Ebitda margin. Management expects the Ebitda margin to maintain current levels in the near term.

The recovery path for HUL’s volume growth appears challenging. 

“With expectations of gradual recovery in volume growth trajectory and pricing growth likely to remain low (marginally negative in H1FY25 and low-single digit in H2FY25 if raw material prices remain unchanged), outlook for FY25 revenue growth in underwhelming,” said an ICICI Securities report dated 25 April.

However, the brokerage points out that in a scenario where material inflation in raw material prices return driven by increased geopolitical concerns, HUL is likely to be a beneficiary on the back of price-led growth and reduced competitive intensity. Much also depends on how monsoons pan out this year and improving macro-economic indicators.

Against the backdrop of subdued demand conditions, analysts have trimmed their earnings estimates for FY25 and FY26. Investors, too, seem to have adjusted their expectations accordingly. So far in 2024, HUL shares have fallen by 16%, underperforming the sectoral Nifty FMCG index, which dropped by 5%. 

“HUL has seen steady de-rating since August 2022, with the current forward price-to-earnings (P/E) multiple at 46x (on consensus), which is about 15% and 5% below its 5-year and 10-year historical average forward P/E, respectively,” said an Emkay Global Financial Services report from 25 April.

According to Emkay’s analysts, a re-rating in the stock requires better execution.

While valuations have tapered, any significant improvement is expected to be gradual, limiting substantial gains. Thus, while HUL’s investors have little reason for alarm, there is also no cause for celebration.