HUL in for short-term growth pangs

The company’s management pointed out that there is significant headroom for growth in the long term. Favourable demographics, urbanization and low penetration for several FMCG categories are some macro factors that can help drive growth. The low FMCG per capita consumption in India versus other developing countries offers wide scope for growth. Overall, HUL expects double digit earnings per share growth in the long-term.

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One of its focus areas would be to grow the core portfolio through superior products and purposeful communications. Under HUL’s WiMI (Winning in Many Indias) strategy, the company has curated region-based portfolios across various categories to drive penetration and market share gains from regional rivals.

Among other growth strategies are market development and premiumization. Premiumization has been a key growth driver for HUL and the portfolio now accounts for about 33% of the product mix. This measure stood at about 22% in FY12. According to the management, a good portion of the about 1,000 basis points (bps) Ebitda margin expansion seen over the past decade came on account of premiumization. One basis point is 0.01%. Ebitda is earnings before interest, taxes, depreciation and amortization. In the beauty and personal care (BPC) segment, HUL intends to grow premium segment two times of market. The company is also looking to grow its e-commerce channel in BPC by four times versus market growth.

Further, the company is stepping up its digital thrust. HUL’s digitized demand capture currently stands at more than 25% from nil a decade ago. Its e-B2B app Shikhar has expanded rapidly and is now being used by over 1 million stores.

“HUL has transformed itself into an interconnected ecosystem powered by data analytics, artificial intelligence, machine learning and predictive decision-making tools. We believe these initiatives make HUL the most ‘future-fit’ in winning the next decade,” Nomura Global Markets Research said in a 21 November report.

While that is encouraging, the near-term path is challenging both on the demand and margin front. “Notwithstanding long-term opportunity, there are short-term concerns,” said analysts from Jefferies India in a 19 November report. “Raw material inflation is a concern with more input prices (ex-palm oil) still elevated and INR depreciation exerting pressure. However, gross margin should recover sequentially in H2FY23 although a part would be re-invested,” they added.

In the September quarter (Q2), HUL saw a sharp year-on-year drop of 580bps in gross margin to 45.8%. The gross margin in Q2 was at a multi-year low. As such, the extent of margin recovery hinges on softening trends in inflation. Muted demand in the rural market is another concern. These factors are expected to weigh on HUL’s earnings in the foreseeable future.

“In view of near-term challenges for all staples, we bring down HUL’s target price-to-earnings multiples to 55x from 60x (based on September 2024 estimated earnings per share),” said analysts at Motilal Oswal Financial Services. In the past year, HUL shares gained by 4%, marginally higher than the Nifty50 index, which has risen by 2%. Better volume growth would improve sentiments for the stock. If overall raw material prices and inflation continue to moderate, volume growth can see an uptick.