The return of lockdowns in Q1FY22 was a setback to Hindustan Unilever (HUL) just as the FMCG giant was getting back on its feet. HUL was shifting its focus on growing rural sales at a time when Covid-19 cases in rural India began surging. At the same time, its distribution in urban areas through general trade channels was disrupted due to lockdowns.
The squeeze came from all sides. Even as revenues were expected to decline due to lockdowns, cost pressures continued. The price of inputs (like palm oil, copra, tea, and coffee) rose in Q1FY22. HUL acted quickly by hiking prices in April 2021. This did ease some pressures on margins, but input costs continue to weigh heavily on the company’s bottomline. With distribution constraints persisting and input cost pressures rising, will HUL be able to weather the storm in Q2FY22?
Revenues and net profits decline, raw material inflation eats into margins
In Q1FY22, revenues were Rs 12,260 crore, a 13% increase YoY. Both quarters (Q1FY22 and Q1FY21) were disrupted due to lockdowns. However, in FY21 HUL strengthened its e-commerce distribution, which helped revenues during the second wave. Net profits were Rs 2,100 crore, an 11% growth YoY in Q1FY22 as interest expenses fell by 2.4X.
HUL’s EBITDA was Rs 2,960 crore, an 8.4% increase YoY but down by 3% sequentially due to rising input costs. The prices of palm oil, crude oil, tea, and coffee are up by 30-50% so far in 2021. This resulted in a 40 bps QoQ contraction in EBITDA margins in Q1FY22.
Rising input costs forced FMCG companies to hike prices across product categories. HUL hiked prices in Q3FY21 which softened margin pressures in Q4FY21 and Q1FY21. This resulted in only a 40 basis points contraction of HUL’s margins. Other FMCG companies’ margins contracted by 250-300 basis points between Q3FY21 and Q4FY21.
In the Q1FY22 earnings call, HUL’s management said it will reduce advertising spends in Q2 and Q3 to cushion the cost impact on its bottom line. As input prices, particularly palm oil (up 66% YoY) and tea (up 45% since March 2021), remain high, HUL could hike prices once again. The company will aim for modest price hikes because it does not want to lose market share to smaller FMCG companies and the unorganised sector.
Another key concern that will prevent HUL from hiking prices is slower sales volume growth. Volumes began rising in Q3FY21 as economic activity recovered, and this continued in Q4FY21. In Q1FY22, HUL’s sales volume growth dropped to 9% on a low base in the year ago period.
Homecare products’ revenues improve in Q1FY22
In Q1FY22, HUL’s homecare products revenues rose by 12% YoY to Rs 3,797 crore. This growth stemmed from higher sales of premium dishwashing liquids (Vim and Rin) in urban areas. As it hiked prices of these products twice (in Q4FY21 and Q1FY22) and its e-commerce distribution channel was strong, homecare sales increased by 2% QoQ despite lockdowns.
Analysts expected the company’s beauty and personal care product sales to decline in Q1FY22. This was because revenues in Q1FY21 declined by 14% QoQ due to the first wave restricting outdoor movement. In Q1FY22, beauty and personal care product sales were Rs 4,858 crore, surprisingly up 13.4% YoY and 3% higher than pre-Covid levels. On a sequential basis, sales remained flat even as outdoor movement declined.
Beauty and personal care products showed resilience because of two reasons. Firstly, HUL hiked prices of its soaps, shampoos, and skincare products in January 2021 due to the rising price of palm oil. As palm oil prices are still elevated in Q2FY22, the company does not expect to roll back these hikes in the coming quarters. Secondly, the company’s health and hygiene products under skincare and oral care saw strong sales growth in Q1FY22 as sanitation worries amid the second wave resumed. This helped the company’s soaps (Lifebuoy and Lux) increase their market share. The beauty and personal care segments’ margins improved 60 basis points QoQ in Q1FY22.
A segment that benefited from the resumption of lockdowns was food and refreshment (Kissan, Knorr, Bru, Horlicks, Boost, Kwality Wall’s) as packaged food consumption increased. In Q1FY21, during the national lockdown, the segment’s revenues rose 52% YoY to Rs 2,958 crore. The second wave similarly boosted this segment’s revenues. In Q1FY22, food and refreshment revenues increased by 12.2% YoY to Rs 3,319 crore. Over a two-year period, its revenues are up by 70%. In Q1FY22, the segment contributed nearly 28% of revenues, up from 18% in Q1FY20.
Rural shift bodes well, while urban recovery is tepid
In the Q4FY21 earnings call, HUL’s management said the focus would be on growing rural sales in Q1FY22. The company adopted this approach because in Q1FY21 rural FMCG sales had outperformed urban sales because of lower cases and relaxed lockdowns.
HUL increased its Shakti entrepreneur program (where it recruits local saleswomen to sell the company’s products) by recruiting 16,000 entrepreneurs in Q4FY21, taking the total to nearly 1.2 lakh Shakti entrepreneurs. In Q1FY22, the company launched sachets of Horlicks and Boost priced between Rs 2-5 which is 20% cheaper to produce than previous versions. These products were launched specifically to increase HUL’s reach in rural areas.
Rural areas were however, hit worse than urban areas by the second wave of the pandemic due to lower vaccination rates and poor healthcare infrastructure. This was expected to impact HUL’s rural sales. But rural demand stayed strong despite lockdowns as customers preferred FMCG products from the organised sector, especially in the health and hygiene categories, the management said. Nearly 85% of HUL’s product portfolio is under health and hygiene, a product category that was considered essential and permitted to be sold during lockdowns. This helped HUL’s health and hygiene product category to grow by 10% YoY.
HUL’s Shikar mobile app used by retailers to manage inventory and make online payments has also gained traction. Due to lockdowns in Q1FY22, retailers could not rely on existing supply chains, and hence they used HUL’s app to stock up on inventory. This resulted in HUL onboarding 50,000 new retailers (10% of total retailers) during the quarter, which helped sales through these retailers jump 6X YoY in Q1FY22. In Q2FY22, the management expects rural demand to improve because of normal monsoons, the government’s rural employment, direct benefit transfer, and minimum support price programs.
HUL’s stronghold still remains in urban areas and its presence in rural areas is weak. FMCG companies like Marcio, Dabur, and Emami dominate rural areas with a greater market share in haircare, skincare, and oral care products. Analysts suggest if rural demand momentum continues for the rest of 2021, it will accrue first to these FMCG companies before HUL.
Analysts also believe the second wave put a dent in HUL’s urban revenue growth rate. HUL’s urban growth rate in Q1FY22 lagged the industry due to the restricted mobility of customers during lockdowns. This was seen in the revenues of the company’s discretionary and out-of-home products (Axe, Glow and Lovely, Lakme, and Elle 18) which declined by 25% YoY in Q1FY22. However, this decline was lower than the 60-70% revenue decline for discretionary and out-of-home products in Q1FY21.
Positive performance across categories despite slowing urban growth
HUL’s performance across the three product categories - homecare, beauty and personal care, and foods was positive in Q1FY22. Homecare’s sales in urban areas were strong owing to the premiumisation of high-value products. Beauty and personal care, which was expected to report sequential revenue decline, recorded flat revenue growth backed by price hikes. Food and refreshments continued to do well amid lockdowns as at-home consumption increased.
The rural focus was expected to backfire on HUL given the severity of Covid-19 in rural India. But a focus on expanding its distribution through Shakti entrepreneurs, sachets, and its retailer app, helped rural momentum to continue in FY22. However, other FMCG companies with a stronger rural distribution network will bounce back in Q2 and Q3, especially in the high-margin beauty and personal care range.
At heart HUL still is an urban FMCG company, and a recovery in urban sales is where its growth momentum lies. HUL expects a swift recovery in urban sales as distribution through general trade channels (local kirana stores) recovers due to higher economic activity. HUL managed to wade through a difficult Q1FY22 - let’s see if its FMCG peers can do the same.
