HUL Q2FY23 results were in line with our estimates on the revenue & operating profit frontHINDUNILVR - 2564 Change: 18.10 (0.71 %)
· Net sales grew by 16% to Rs 14514 crore (Idirect estimate : Rs 14203.5 crore) largely led by pricing growth. Volumes have grown at 4% (Idirect estimate : 3%) during the quarter. Home care and Beauty & Personal care (BPC) segment saw sales growth of 34% & 11.2% respectively. Foods & Refreshment segment saw 3.7% growth during the quarter. Given the company was holding high cost raw material inventories, it only initiated price cuts & grammge restoration in October 2022
· Gross margins contracted by 580 bps considering the company was holding high cost raw material (palm oil, crude derivatives) inventory. With such a steep gross margin contraction, the company cut advertisement & overhead spends by 249 bps & 163 bps respectively. Operating profit grew by 7.8% to Rs 3377 crore (Idirect estimate : Rs 3466.1 crore) with operating margin contraction of 176 bps to 23.3% (110 bps lower compared to our estimate)
· Home care & BPC segment margins contracted by 168 & 270 bps respectively. We believe sharp correction in palm oil & softness in other key commodities would result in margin recovery as well as volume uptick from Q3FY23 onwards
· Net profit grew by 19.6% to Rs 2616 crore (Idirect estimate : Rs 2446.8 crore) mainly on account of Rs 258 crore one-time prior period tax credit during the quarter
HUL has taken price cuts in October 2022 mainly to pass on the benefit of dip in palm oil prices. Though other commodities have soften from the peak, they are still at an elevated levels compared to historic averages. With the passing of the benefits of RM cost reduction, the company would be looking to grow volume at a faster pace. We believe strong growth in rural income levels on account of higher agri prices along with grammage increase in lower SKUs would bring back volume growth specifically in rural & semi-urban regions. We also believe gross margin would see an uptick from Q3FY23 onwards. The volume growth along with the margin expansion would result in strong profit growth going forward. We remain positive on growth prospects as well as margin expansion possibility in medium term.