We believe that the worst is behind us: Sanjiv Mehta on HULâ€™s Q2 FY21 results

Hindustan Unilever Limited (HUL) has reported 9 per cent increase in profit after tax (PAT) at Rs 2,009 crore for the quarter ending September 30, 2020, compared to Rs 1,848 crore in the corresponding quarter of FY2020. Earnings before interest, tax, depreciation and amortization (EBITDA) at Rs 2,869 crore was up by 17 per cent. Total sales grew by 16 per cent during the quarter; underlying domestic consumer business sales (excluding the impact of business combinations) grew by 3 per cent in the quarter.

Growth in the quarter was competitive and profitable with Reported Turnover Growth of 16 per cent and Domestic Consumer Growth (excluding the impact of merger of GSK CH and acquisition of ‘VWash’) of 3 per cent. The strength of HUL’s portfolio is demonstrated by the fact that 70 per cent of its business is gaining penetration. Health, Hygiene and Nutrition form 80 per cent of HUL’s portfolio grew in double digits.

Sanjiv Mehta, Chairman and Managing Director, HUL, commented, “In the context of a challenging economic environment, our growth has been competitive and profitable. We continue to demonstrate execution prowess, agility, adaptability, resilience, and passion of our people. We have expanded our portfolio with consumer relevant innovations and have invested strongly behind our brands. Our operations and service levels are now back to pre-COVID levels and we have accelerated the pace of digitising our operations under the ‘Re-imagine HUL’ agenda.”

Mehta further said, “The economic outlook has improved, given the various initiatives taken by the Government and the Reserve Bank of India. In our sector, rural markets have been resilient but the demand in urban India, especially in metropolitan cities, has been muted. We believe that the worst is behind us and we are cautiously optimistic on demand recovery.”

Analysing HUL’s Q2 FY2021 results, Motilal Oswal Institutional Equities stated that outlook for the company is gradually improving. The discretionary part of its portfolio (15% of sales) is seeing gradual recovery. HUL’s Q2 FY2021 health, hygiene and nutrition portfolio (80% of the portfolio) grew 10% YoY (v/s ~6% in Q1 FY2021), discretionary categories (15% of portfolio – skin care, cosmetics, deodorants) declined 25% YoY (v/s ~-45% in Q1 FY2021), and out-of-home categories (5% of sales) declined 25% YoY (v/s ~-70% in Q1 FY2021).

According to Motilal Oswal’s analysis, “The company is seeing: (a) ad-spends inching up (-5% YoY; ahead of expectations), (b) sharp increase in palm oil costs, and (c) mix deterioration. Thus, HUL did well in growing its EBITDA margins (including GSKCH) by 30bp YoY and restricting like-for-like margin decline to only 60bp YoY. Margin outlook for HUL has also improved as share of its discretionary portfolio to total sales should increase sequentially.”

Performance better than expectations

Net sales grew 16.1% YoY to Rs 114.4 billion (est. Rs 109.2 billion). EBITDA grew 17.4% YoY to Rs 28.7 billion (est. Rs 27.3 billion) and PBT grew 16.4% YoY to Rs 27.4 billion (est. Rs 26.3 billion). PAT (bei) was up 11.1% YoY to Rs 20.4 billion (est. Rs 19.3 billion).
Domestic consumer business sales grew 3% YoY with underlying volume growth of 1% YoY (excl. GSKCH and v/s our est. of +3%).
Margins: Overall gross margin for the quarter contracted by 150bp YoY to 53%. As percentage of sales, flat operating expenses YoY at 13.1%, lower ad spends (down 220bp YoY to 10%) and higher staff cost (up 50bp YoY to 4.9%), led to EBITDA margin expansion of 30bp YoY to 25.1%.
Segmental performance: Home Care (29% of total sales for 2QFY21) revenues were down 1.6% YoY with margins expanding 280bp YoY to 20.4%. Personal Care sales (40% of total sales) were flat YoY with margins expanding by 30bp YoY to 29.3%. Food & Refreshment sales (30% of total sales) were up 82.9% YoY with margins expanding 60bp YoY to 16.5%.
H1 FY2021 sales/ EBITDA/ PAT growth stood at 10.2%/ 8.3%/ 9.1% YoY.
Cash and cash equivalents (incl. investments) stood at Rs 53.1 billion as of September 2020, down 30.4% YoY/ 15.3% vis-a-vis March 2020.
CFO and FCF for H1 FY2021 were both down 19% YoY to Rs 39 billion and Rs 36.5 billion, respectively.
The company has declared an interim dividend of Rs 14 per share for FY2021.