A year ago, Hindustan Unilever (HUL) was in a fix. The FMCG company’s diverse portfolio of beauty and personal care, homecare and nutrition, all declined in revenues in the March 2020 quarter. With supply chain issues, labour shortages, and declining demand, HUL had to move fast to shift its focus to rural areas and its homecare and foods segment.

In the subsequent quarters, as the economy began to open up, and HUL’s segmental performance shifted from beauty and personal care to homecare and foods. Homecare (Surf Excel, Domex, Rin, Vim.) and beauty and personal care (Vaseline, Clinic Plus, Tresemme) took a hit in Q1FY21 and Q2FY21, as outdoor movement was minimal due to the pandemic induced lockdown. In the second half of FY21, homecare recovered as at-home premium consumption increased, while beauty and personal care continued to decline. Food and refreshments (Horlicks, Kissan, Bru, Knorr) managed to stay resolute through FY21.

After a poor H1FY21, HUL recovered quickly. Understanding the change in customer preferences from outdoor and discretionary to at-home and essential, it prioritized the homecare and health and hygiene segments. This allowed the company to close FY21 with stellar revenue growth and record a fourth consecutive quarter of net profit growth.

Revenues, profits recover after a slowdown in Q3

Heading into Q4FY21, analysts were pessimistic on HUL’s results. This was because of slowing revenue growth as sales of beauty and personal care products fell with decreased outdoor movement. Makeup, after all, is for other people: stuck at home, track pants and uncombed hair became the norm. In Q1, revenues grew by 18% QoQ. This slowed to an 8% QoQ growth in Q2, and a 4% QoQ growth in Q3.

In Q4, revenues jumped 35% YoY and 3% QoQ to Rs 12,433 crore due to an increase in revenue from the homecare segment. Net profits grew by 44% YoY and 13% QoQ as HUL lowered its finance costs by 75% QoQ and didn’t increase its advertising expenditure.

Margins at both an operating and net profit level were closely watched by brokerages, and they weren’t disappointed. In Q3, net margins slipped to 15.6%, the lowest since March 2019. In Q4, HUL’s earnings before interest and tax (EBIT) was Rs 3,043 crore. EBIT Margins were 24.5%, a 30 basis points rise QoQ. Net margins rose 180 basis points QoQ to 17.6%, the highest since September 2019.

Food and refreshments outperform

HUL’s two main segments - homecare, and beauty and personal care made up 68% of revenues in FY21. The food and refreshments segment (28% of revenue in FY21) saw stellar growth in the year as outdoor consumption increased the preference for packaged foods. 

In Q1, the homecare and beauty and personal care segments saw sequential revenue growth of 2-5%. The food and refreshment segment’s revenue grew by 65% as at-home consumption was high. The beauty and personal care segment grew in Q2 and Q3 through higher sales of health and hygiene products (mainly Lifebuoy) while skincare and haircare sales were low in both quarters. This is because outdoor movement was still limited and hygiene was a priority. 

In Q4, the personal care segment declined once again, while homecare and foods and refreshment grew by 13% and 5% respectively.

Homecare saw steady growth in the first three-quarters of FY21. This was because the products under the homecare segment are essential cleaning products consumed at home. Relatively cheaper detergents like Domex and Surf Excel saw steady sales even during the lockdown months. Premium products like Vim and Pureit recovered in urban areas through increased e-commerce distribution.

The segment to perform the best during the pandemic was the food and refreshments segment. In Q1FY21, the segment made up less than 20% of HUL’s revenues. By March 2021, its share jumped to 28%, recording Rs 3,511 crore in revenue, a 96% YoY growth. The growth was because people preferred packaged and ready-to-make foods with a longer shelf life.

The beauty and personal care segment was also hit by higher raw material prices. The price of palm oil has increased by 15% in one year. This forced HUL to take a 7-8% price hike in the skincare and haircare segment in Q3. This pushed the EBIT margins of the beauty and personal care segment lower by 170 basis points QoQ. 

Price hikes in the homecare and foods segment have also been announced. Its tea brands (Lipton and Brooke Bond) will undertake a price hike and the 2019 price cuts on detergents have been called off. Brokerages expect this to push down the rising margins of these segments as well.

Rural demand rise to help homecare

Like it did at the start of FY21, rural demand rose in Q4 as Covid-19 cases began to rise. The management said that rural demand grew in double digits in the March 2021 quarter, while urban demand was positive. But this growth was varied at a segment level.

Urban demand for beauty and personal care products, mainly under health and hygiene, was higher leading to a 20% YoY jump in the segment’s revenue. However, this was the worst affected segment in H1FY21, due to the incidence of lockdowns in urban areas. Urban demand did increase by 2-5% QoQ in Q4, but this is expected to fade. With lockdowns announced in states throughout the country once again, brokerages expect this segment's declining performance in Q4FY21 to continue in Q1FY22 because of HUL’s dependence on urban consumers. 

HUL, like most FMCG companies, put greater focus on rural areas in H1FY21. Rural demand was higher as labourers migrated back home during the lockdown months. This was helped by a higher disposable income due to good monsoons and a lower degree of lockdowns in rural areas. Sanjiv Mehta, HUL’s managing director said rural demand grew in double digits for the second consecutive quarter in Q4. In order to capture this demand, in the food and refreshments category, HUL launched sachets of Horlicks and Boost worth Rs 2. 

If rural areas aren’t hit as bad as urban areas by the second wave of Covid-19, brokerages suggest the demand for HUL’s products will sustain. Rural distribution is undisrupted, and since lockdowns are localised, rather than nation or statewide, rural distribution will hold strong. This will be helped by its Shakti entrepreneur program where HUL recruits local saleswomen to sell its products. In Q4, it recruited 16,000 entrepreneurs for this program, a 14% QoQ growth. However, these markets, especially for food and refreshments, are occupied by more established rural-players like Marico and Dabur. Even with HUL’s strong volume growth in H2FY21, to compete with these companies will prove difficult.

FY21 hindsight to bear fruit?

While FY22 will be uncertain for most industries, FMCG companies have the benefit of hindsight. Many companies, including HUL, have already re-purposed their supply chains and products, from discretionary to essential and from urban to rural. Since HUL’s reliance on urban and discretionary products is high, it had a rough H1FY21. But the FMCG major seems to have learnt its lesson.

HUL has strengthened its homecare and food and refreshments segment, which have increased margins and revenue share in FY21. The beauty and personal care segment is focusing more on its health and hygiene vertical. Rural distribution is being strengthened by higher penetration of Shakti entrepreneurs and e-commerce channels. However, because a large part of HUL’s product portfolio does not fall in the essential category and it still has a high urban dependence, it is uncertain whether these will bear fruit.