This move will help drive volume growth, especially in rural areas
As expected, HUL announced price cuts across some SKUs (stock-keeping units) of soaps in west India. This is HUL proactively (vs. regional players) taking/protecting market share as RM/packaging costs slip. GCPL, few weeks ago, cut prices in select SKUs in soaps – the entire industry may follow suit soon (given palm oil has halved from its peak). Separately, contrary to news reports, detergents have not seen any price cuts. We expect this move to help drive volume growth, especially in rural and the lower-end. Price cuts in soaps is currently in west India (as part of WIMI strategy). This trend reversal to price cuts, from price hikes and grammage cuts over the past year, aligns with our view of H2FY23 gross margins improving. Maintain ‘Buy; target price unchanged at `3,050.
Price cuts as expected
We see this as a proactive step by HUL to retain/protect market share. When RM (raw material) prices fall, regional players tend to come back in terms of promotion and ad-spends (as seen in tea and coconut oil). We expect this to drive volume growth for HUL in H2FY23E and FY24E.
In the past year, volume growth for HUL was impacted due to grammage cuts/price hikes. We expect both gross and Ebitda margin expansion in H2FY23E (vs H1FY23) and FY24 but, Q2FY23 margins will remain weak owing to lagged effect and consumption of higher cost inventory. Separately, contrary to reports, we emphasise that detergents have not seen any price cuts.
Volume growth to revive from H2
In Q2FY23, we expect ~14% y-o-y price growth for HUL, but volume growth likely to be 2% y-o-y . Given key RM deflation, HUL’s priority will be to seek a more balanced volume-pricing mix. Subdued volumes have prevailed, especially in rural areas. For the past two years, FMCG companies have been taking price hikes to pass on higher RM prices to the consumer.
Outlook and valuation.
Crude oil price and INR remain key monitorables. With the price cuts undertaken, HUL has prioritised market share against smaller incumbents given softer cost of RM. With this move, there is a shift in strategy from price hikes/grammage cuts to grammage increase/ price cuts. Also base in H2FY23 will turn favourable in rural.