by Suhani Adilabadkar

From the first kick of coffee in the morning to brushing your teeth in the night, a Hindustan Unilever brand is hard to miss. Whether it's Bru or Brook Bond, Dove or Lux, Boost or Horlicks, Surf Excel or Wheel, Clinic Plus or TRESemme, nine out of every ten Indian households use HUL products, and they cater to pretty much everyone across their brand logos: mass, premium, elite, rural, urban - and now in the COVID era, in the varied zones of red, orange and green. 

Hindustan Unilever, the most profitable FMCG company in India has also been infected by coronavirus, with falling volumes and sales numbers impacted by the lockdown and supply disruptions since early March. But this is a resilient behemoth. With more than 44 brands from 14 distinct product categories, HUL is capable of navigating a volatile post-covid economy, and emerging out not only resilient but with a more strengthened competitive position.    

Quick Takes:

• Operating revenues de-grew 9.7% YoY at Rs. 9211 crore against Rs. 10,201 crore impacted by lower manufacturing activity and supply disruptions.

• HUL’s market share grew 50 bps with 80% of its portfolio gaining share in the march quarter FY20.

• HUL has improved its production levels from 5% in march to 75-80% in the month of april.

• HUL has increased production of hand sanitizers by a factor of 60x from its pre-covid levels.

• HUL notes that households have started using smaller packs instead of bigger ones especially for home care, retreated to fewer number of toothpaste brands, and sharing of toothpaste and other personal care products within a household. In addition to this, there has been downtrading with consumers choosing lower value products over premium ones.

• Before Covid-19 came to India, FMCG market growth had already slowed down to 0.3x of 2018 levels in value terms, and 0.2x in volumes in Q3 (December quarter) FY20. 

March Quarter Hit by Covid-19

The last 15 days of March hammered growth for businesses in the fourth and final quarter of FY20. HUL reported disappointing numbers for Q4FY20 with revenues, operating profit and PAT all in the negative zone. Operating revenues fell 9.7% YoY at Rs. 9,211 crore against Rs. 10,201 crore in the same quarter last year, impacted by lower manufacturing activity and supply disruptions in the second half of march. 

Operating profit stood at Rs. 2100 crore in Q4 FY20 compared to Rs. 2394 crore corresponding quarter previous year declining 12% YoY with margins coming out at 22.8%, contracting 67 bps YoY in the March quarter FY20. PAT came out at Rs. 1,512 crore in march quarter FY20 against Rs. 1,574 crore in the same period previous year falling 4% YoY. Despite volume decline of 7% and 9% fall in domestic consumer growth, HUL’s market share grew 50 bps with 80% of its portfolio gaining share in the March quarter FY20, resilient performance in unprecedented volatile times. 

Can FMCG be a safe haven in the pandemic? 

Before Covid-19 came to India, FMCG market growth had already slowed down to 0.3x of 2018 levels in value terms, and 0.2x in volumes in December quarter FY20. The rural market had witnessed sharp deceleration as rural to urban growth index fell to 0.5x. Though the food segment was somewhat insulated, discretionary spends were already showing the effects of a slowdown, impacted by higher retail inflation, crude and commodity volatility, liquidity constraints and lower income levels. 

Domestic slowdown with subdued consumer sentiment was accentuated by Covid-19 as well as supply and material procurement disruptions even before the nation-wide lockdown was announced on 23rd March. HUL witnessed its operation levels falling to as low as 5% in the month of March after lockdown along with falling distributor and trade inventories.

Coming to the segment-level performance, home care, beauty & personal care, as well as food & refreshment ended up in negative territory. Home care was impacted by the water purifier business (Pureit) which declined 4% YoY contributing 38% to revenue mix followed by foods & refreshment falling 7% YoY, constituting 20% and beauty & personal care with largest decline of 14% putting in 42% in revenue basket in Q4 FY20. 

Decline in skin, hair and cosmetics products impacted beauty & personal care whereas out of home channels and ice cream business were severely squeezed from mid-march impacting foods & refreshment segment. 

FMCG sector is thought to be a safe haven amidst the slowdown as people with set routines and lifestyle indulgences cannot do without beauty & personal care products, home care and other essentials. But with the twin effects of a slowdown and covid-19, consumer preferences and spending patterns are bound to alter.

For instance, HUL notes that households have started using smaller packs instead of bigger ones especially for home care, retreated to fewer number of toothpaste brands within a household and sharing toothpaste and other personal care products. In addition to this, there has been downtrading with consumers choosing lower value products over premium ones to maintain their monthly budgets. HUL which had been reporting just 5% volume growth since the June quarter FY20 every quarter, witnessed 7% decline as covid disruption started from March. Clarifying, in this respect, Mr. Sanjiv Mehta, CEO and MD, HUL said, “We should have normally delivered a value growth in the vicinity of 3% because we were gaining market share and the market was at about 2.5%, but we ended up with 9% negative”. The management attributes de-growth to reduced stock levels at distributor locations, lower stock with retailers and actual loss of consumer demand. 

Changing priorities during Covid-19

Health and hygiene is the new growth mantra in the current Covid-19 environment. HUL has increased production of hand sanitizers by a factor of 60x from its pre-covid levels. In addition to this, prices of essential products such as Lifebuoy liquid handwash and Domex floor cleaners have been reduced. The company also aims to launch new products such as disinfectant sprays, cloth sanitizers and wipes in the next few weeks adapting to changing consumer preferences. HUL has improved its production levels from 5% in march to 75-80% in the month of April. 

There’s no getting around it: the HUL juggernaut is the best FMCG play

The company with its robust product portfolio catering to health, hygiene, nutrition, home cleaning, skin care and tea, and coffee beverages, is better positioned amidst this covid storm than the rest of its smaller peers. 

In fact, HUL reported its highest ever PAT CAGR of 14% over the past three years, compared to Dabur, Marico and Godrej Consumer which remain in single digits. The company is the best play in the FMCG sector, supported by its robust portfolio straddled across the entire societal pyramid catering to mass, premium and elite segments aided by robust balance sheet, strong cash flow generation and ever humming innovation engine. But what analysts are looking forward to is the integration of Horlicks, coming under the same fold of nutritional business along with Boost. And its consequent margin accretion and benefits amidst covid could aid HUL’s growth.