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Hindustan Unilever Ltd. (HUL), India's largest household goods company, is facing a persistent challenge: muted volume growth. The company's performance in the September quarter (Q2FY25) has raised concerns about the momentum of India's consumption story. Underlying volume growth stood at a mere 3%, falling short of analyst expectations of 5%. This sluggish growth highlights the impact of weak demand and persistent food and commodity inflation, which are affecting both HUL and its consumers.
Food inflation continues to put pressure on urban demand, hindering HUL's ability to expand margins. As a result, the company's gross margin for Q2FY25 contracted by 150 basis points to 51.6%, reflecting the strain from rising commodity costs. Despite solid double-digit growth from its premium skincare products, HUL's overall personal care portfolio experienced a low single-digit volume decline in Q2 due to price hikes implemented to manage input cost inflation. The food and refreshments segment also reported a volume decline, particularly in tea, which faced an unprecedented 25% year-on-year inflation in Q2.
HUL's attempts to drive volume growth and market share gains through competitive actions or new formulations in tea and soaps have failed to yield results in Q2, according to Kotak Institutional Equities. While a significant portion of HUL's portfolio, including home care and beauty & wellbeing products, achieved 7-8% underlying growth and gained market share, the return of price growth remains crucial. However, management projects only low single-digit growth for the second half of FY25. The management's commentary on demand offers little optimism, as hopes for a festive season recovery have been tempered. HUL now anticipates underlying volume growth to remain steady at current levels, revising earlier projections of gradual improvement.
Ebitda margins are expected to remain range-bound in the near term, with rising employee costs further eroding profitability. These challenges have led to earnings downgrades from brokerages. IIFL Securities Ltd., in a report, highlights the polarized growth within HUL. The report downgraded sales estimates for FY25-27 by 1.5%-3% and Ebitda and EPS by 2-4% due to the weak demand trends and the Q2 results. While HUL continues to push premium products by enhancing their value proposition, this strategy may not be sufficient amidst a slowing urban demand and a sluggish rural recovery.
The company's premiumization efforts alone are unlikely to drive the growth narrative, and the market seems to be taking notice. In calendar year 2024 so far, the HUL stock has declined 7%, underperforming the Nifty FMCG index, which has delivered a modest 2% return. HUL's decision to separate its ice-cream business has also dampened investor and analyst sentiment, despite the segment's muted growth in Q2FY25. The ice-cream business, contributing 3% to HUL's total turnover, is highly capital-intensive and operates on thin margins. However, despite high growth opportunities, a different operating model, and a distinct channel landscape, the ice-cream business limits synergies with the rest of HUL, according to a Nuvama Research report.
The separation is intended to help HUL focus better on its core business. While this move might be beneficial for the company, it could have a negative impact on its stock, as the same report suggests that exiting the ice cream business is not the best option. The report argues that ice cream is a high-growth business and HUL is a strong number two player. At FY26 price-to-earnings, the HUL stock is trading at a multiple of 48x, according to Bloomberg data, which is considered expensive in the current scenario. HUL's challenges in navigating the current economic climate and its reliance on premiumization alone may not be enough to overcome the sluggish demand and food inflation pressures. The company's ability to regain momentum and meet investor expectations remains uncertain.