scorecardresearch

Hindustan Unilever’s margins may fall below mid-term guidance of 24-25%: Analysts

HUL’s net material inflation is up 4.5x over June 2020 and if spot prices were to sustain, the index is likely to go up further in the coming two quarters.

Hindustan Unilever
HUL’s gross margins declined a sharp 300 basis points to 48.5%, the lowest in seven years. (Reuters)

A relentless rise in raw material prices could impact Hindustan Unilever’s operating margins in the coming quarters, and they may even temporarily fall below the company’s medium-term guidance range of 24-25%, analysts have said.

The FMCG major reported a 20 basis points y-o-y decline in Ebitda (earnings before interest, tax depreciation and amortisation) margins to 24.6% during the March quarter. Despite the pressure on gross margins, rationalisation in advertising spends (down 9% y-o-y) and a moderate increase in employee cost coupled with other cost efficiency measures supported profitability.

However, raw material inflation accelerating and Indonesia banning palm oil exports have added to the volatility. HUL told analysts it expects margins to decline over the next two to three quarters. The company expects inflationary pressure to continue for soaps, home care products and packaging material due to a sharp rise in key commodities: palm oil and crude. The company said palm oil and crude prices are up 60% year-on-year and polyethylene has increased 20% y-o-y in the March quarter.

HUL’s net material inflation is up 4.5x over June 2020 and if spot prices were to sustain, the index is likely to go up further in the coming two quarters. “Given this backdrop, the company expects Ebitda margin to decline in the coming quarters and may temporarily fall below the company’s medium term guidance range of 24-25%,” analysts at Kotak Institutional Equities said.

Weighed down by the impact of the tough macro conditions, HUL’s gross margins declined a sharp 300 basis points to 48.5%, the lowest in seven years. “This was despite a near 10% growth in realisations, which suggests more than 15% inflation in the RM (raw material) basket,” analysts at Jefferies said. The foreign brokerage remained below consensus on HUL’s FY23-24 earnings. “We expect substantial near-term margin headwinds, which would need price hikes to offset. However, the recent correction largely factors this in,” it said.

However, analysts believe the company will mitigate the impact through cost-saving initiatives like changing product formulations and packaging, reducing distance travelled and calibrating pricing, which will include further reductions in grammage and bridge packs. Also, continued premiumisation will help the company mitigate the near-term headwinds. The premium portfolio of the company has seen a 2x growth in the last financial year versus the rest.

Ritesh Tiwari, chief financial officer, HUL, told reporters on Wednesday the company would drive savings harder and take calibrated pricing action, while protecting and growing the consumer franchise. “Our margins will decline in short term as price versus cost gap increases,” Tiwari said. The management told analysts the company expects to consistently outperform FMCG market growth and is confident of margin recovery in a phased manner.

According to Motilal Oswal, escalating material costs and lower-than-expected premiumisation constrained HUL’s earnings growth (ex-GSK) over the past two years, and both factors are likely to inhibit the company’s earning in the first half of FY23 as well.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Most Read In Industry