Hindustan Unilever Ltd.’s quarterly profit missed street's expectation and volumes contracted as demand fell due to the Covid-19 lockdown. Profit fell 1.2% YoY to Rs 1,519 crore in Q4FY20 earnings. The revenue fell 9.4% to Rs 9,011 crore and its sales volumes fell 7%.
This fall in sales was largely impacted because of COVID-19. The management stated that the production fell to zero for seven days post 25th May due to the implementation of phase 1 of the nationwide lockdown.
Given its record of outperforming peers after previous disruptions, HUL is likely to be among the first companies in India to bounce back after the COVID lockdown. Looking at the current scenario a 10-12% volume decline is expected in Q1FY20 and normalcy to come from Q2FY21 with growth in volume.
Across segments, Home Care continued to be the biggest contributor with revenue growth of around 6% in FY20 followed by Food and Refreshments which grew by 4.4%. However, HUL's Beauty and Personal care and Other business division grew by 1.8% and 37.9% respectively.
Although the lockdown will impact margins in the near term, the company leaves no stone unturned to put it back on the expansion trajectory via cost-saving initiatives such as zero-based budgeting, efficiency in ad spends, changes in route-to-market, etc. which are bound to improve margins. The annual report indicates that HUL was able to generate gross cost savings of 7% of sales in FY20, another remarkable achievement, which also underlines the potential for margin improvement over the longer term.
As of April 1, HUL has merged GlaxoSmithKline Consumer Healthcare’s (GSKCH) business with itself in an all-equity merger. HUL also bought the Horlicks brand in India for a cash consideration of Rs 3,045 crore from GSK Plc. HUL’s wider distribution reach will allow GSKCH’s brands to penetrate deeper into India’s hinterland.
GSKCH’s acquisition should help HUL acquire shelf space in the chemist channel, where P&G has a stronger presence due to its over-the-counter (OTC) portfolio. This could change into high-quality consumer-facing shelf space for HUL’s products. This strategic approach is also demonstrated by HUL’s recent acquisition of “VWash” from Glenmark Pharma.
To cater to the rising demand, HUL would be launching several new products in the space in the next few months such as Lifebuoy 'germ kill spray', Domex disinfectant sprays, germ removal wipes, Lifebuoy cloth sanitizer and Surf Excel anti-germ wash booster.
Looking at the last 5-year financial performance, HUL has reported an increase in revenue by 15% to Rs 39,783 crore as compared to Rs 34,616 crore in 2016. The Profit for the company also stood at Rs 6,764 crore, up by 63% as compared to Rs 4,158 crore during the same period. In terms of profitability ratio, the company has managed to keep on increasing its return on equity (RoE) and Profit Margins. RoE has increased from 63.65% in 2016 to 83.95% in 2020 while Profit Margins increased from 12.01% to 17%. Although, Debt-to-equity has increased to 0.10x from 0.03x in 2016, the Free cash Flow stands at Rs 6,761 crore from 3,361 crore which tells us that the company has a robust financial status and can withstand the current crisis.
Key Risks:
Increase in competition with entry of new players
Fluctuation in raw material cost
Slowdown in consumption demand
Final Thoughts:
HUL delivered a weak set of numbers in Q4FY20 both on the volume and profitability front amidst COVID-19 disruptions and weak consumer demand environment. Superior branding and the company’s focus on innovation and market development should help HUL in achieving sustainable volume and value growth going forward compared to its peers. The recent merger with GlaxoSmithKline Consumer Healthcare will help propel its growth prospects by housing well established brands such as Horlicks, Boost while simultaneously providing synergy benefits.
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