Hindustan Unilever earnings show raw material costs continue to hurt FMCG margins

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In recent months, a spike in commodity prices, driven by supply-side challenges in the pandemic and then the Russian invasion of Ukraine, has put pressure on consumer goods companies in rapid evolution. June quarter results announced by Hindustan Unilever, the country’s largest consumer goods company, show that raw material cost inflation remains a concern and executives say it is also likely to remain so over the course of the quarter July-September.

Companies have raised prices to counter cost pressures, but high inflation has in turn weighed on demand, more so in rural markets, which is also concerning.

HUL reported a standalone net profit of Rs 2,289 crore in the first quarter, up 11% from net profit of Rs 2,061 crore a year ago. Revenue from product sales increased by more than 19% to Rs 14,016 crore from Rs 11,730 crore. While the company benefited from market share gains across all categories, it should also be noted that last year’s June quarter earnings were impacted due to the second wave of COVID-19. Volume growth (packs sold) in the June quarter was 6%.

Also due to commodity cost pressures, HUL’s EBITDA (earnings before interest, tax, depreciation and amortization) margin declined 110 basis points to 23.2%. This even as the maker of Lux soaps and Red Label tea raised prices by 12% in the last quarter.

“Sequentially, commodity markets have further inflated in the June quarter and most commodity prices are at very high levels,” said Ritesh Tiwari, HUL’s chief financial officer.

He said the commodity inflation the company faced was 20% last quarter. In recent weeks, the cost of certain raw materials such as palm oil has fallen. However, given the high cost of inventory contracted earlier and the cost of many other commodities such as crude oil, caustic soda and plastics remaining high year over year, it may Not too much respite in the September quarter either, with a positive sequential impact on expected December quarter margins.

“In the short term, growth will be driven by prices. Inflation continues to have an impact on consumption. Most commodities have further inflated in the June quarter and continue to hold at very high levels. This, combined with the consumption of higher cost inventory, will cause September quarter margins to remain under pressure,” Tiwari said.

Sanjiv Mehta, Managing Director and CEO of HUL, also pointed out that market volume growth has remained negative over the past three months and corporate pricing action continues to drive growth.

“The urban is a little better, last year it was more impacted due to the COVID wave. Urban rebounded; Modern commerce, essentially urban, has also rebounded strongly. So the city looks better than the countryside,” he said.

Rival companies like Godrej Consumer Products had also recently warned that the FMCG industry continued to remain soft.

“It continues to be hit hard by worsening levels of inflation due to geopolitical tensions, driving successive price increases and impacting volumes,” soap maker Cinthol said.

Edible oil maker Marico also warned of a single-digit volume decline in the Indian sector in its quarterly update.

“Current trends indicate that consumers have been titrating their consumption in certain non-essential categories and either lowering prices between brands or opting for smaller packaging in essential categories,” he said.

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