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Informist, Friday, Oct. 18 2024

 

By Anshul Choudhary

 

MUMBAI – Hindustan Unilever Ltd. is likely to report higher volumes compared to a year ago on the back of price cuts taken during the September quarter, according to analysts. However, an increase in prices of key raw materials such as palm oil and tea likely hit profitability and the company may fail to report any growth in net profit during the quarter.

 

The company's net profit is seen largely unchanged on year at INR 27.08 billion during the quarter, according to an average of estimates from 15 brokerages. The estimates range from INR 25.92 billion to INR 29.11 billion. Analysts said the rise in procurement prices for tea and palm oil likely affected profitability, with the company's earnings before interest, tax, depreciation, and amortisation seen rising a mere 1.5% on year to INR 37.50 billion, according to the average of estimates from 13 brokerages.

In September, the government levied a basic customs duty of 20% on crude palm oil imports, effectively raising the cost for companies importing it. Nuvama Institutional Equities said palm oil prices increased 5% on year during the quarter, while tea procurement prices increased 34%.

 

The company's operating profit is also expected to take a hit due to an increase in the rate at which royalty is paid to parent Unilever and the termination of the distribution agreement with GSK Consumer Healthcare. Hindustan Unilever raised the royalty rate in January 2023 to 3.45% of revenue from 2.65% in 2021-22 (Apr-Mar). With the combined effect of higher royalty and raw material prices, most brokerages expect the company's EBITDA margin to decline from a year ago in the September quarter. 

 

While analysts expect pressure on margins, Hindustan Unilever may report higher sales for the second consecutive quarter after failing to grow revenue in Jan-Mar and Oct-Dec. Its revenue in the latest quarter may rise 3.4% on year to INR 157.91 billion, according to the average of estimates from 15 brokerages. The estimates range from INR 154.63 billion to INR 166.83 billion.

Shares of the company had risen over 6% in September in anticipation of better earnings. However, they lost most of the gains in October after the risk of a spike in food inflation came to the forefront as several parts of India faced floods during the monsoon. A sharp or sustained spike in food inflation would reduce discretionary spending, including on fast-moving consumer goods.

 

The company is likely to report higher sales, driven by better demand during the quarter with rural demand improving slowly from a low base last year, analysts said. Most brokerages expect volumes during the quarter to grow 5% on year, better than the rise of 4% seen in Apr-Jun and 2% in Jan-Mar.

 

Analysts said part of the reason for higher volumes is the price cuts effected by the company. According to Nuvama Equities, Hindustan Unilever cut prices by 1% during the quarter, lower than the price cut of 2.5% during the previous quarter. The volume growth during the quarter is expected to partly come from its soaps segment, where the company has likely cut prices despite competitors increasing prices due to the higher prices of palm oil, a key ingredient in making soaps.

 

Analysts said Hindustan Unilever is able to sell soaps cheaper despite higher palm oil prices as it has recently changed the formulation of its soaps, which now uses less palm oil. The change is likely to limit the impact of higher palm oil prices on margins. This is most likely to be seen in the company's sequential performance with net profit seen rising nearly 7% compared to the previous quarter. Sequentially, sales are seen rising a modest 3%.

 

Over and above this, the duty on palm oil is expected to benefit large players such as Hindustan Unilever, which can claw back market share lost to unorganised players when input costs were lower. "(Raw material) Inflation is generally good for organised companies as unorganised players who work with thin margins or cost-plus models usually end up taking higher price hikes than organised players, in turn lowering the price premium gap between them which aids organised players to recruit consumers or expand their franchise," Nomura said in its earnings preview.

 

On Friday, shares of the company closed at INR 2,722.95, down 0.6% from the previous close.

 

Hindustan Unilever is scheduled to announce its quarterly earnings on Wednesday. 

 

Following are the Jul-Sept earnings estimates for Hindustan Unilever, in mln rupees, based on reports compiled by Informist from 15 brokerages:

 

Brokerage Name	Net Sales	Net Profit	EBITDA
Anand Rathi Share and Stock Brokers Ltd	154,778	27,868	-
Antique Stock Broking Ltd	157,730	27,746	38,093
Axis Securities Ltd	156,210	27,140	37,420
Centrum Broking Ltd	159,620	26,911	37,351
Elara Securities (India) Pvt Ltd	157,365	26,581	37,100
Emkay Global Financial Services Ltd	157,967	26,916	37,346
HDFC Securities Ltd	154,628	27,485	37,934
Kotak Institutional Equities	157,283	26,569	36,866
KR Choksey Research	166,828	29,110	40,173
Motilal Oswal Financial Services Ltd	159,977	26,964	37,755
Nirmal Bang Equities Pvt Ltd	157,404	26,532	37,147
Nuvama Wealth Management Ltd	156,281	26,236	36,675
Prabhudas Lilladher Pvt Ltd	158,107	27,032	37,629
Sharekhan Ltd	157,940	27,130	-
YES Securities (India) Ltd	156,552	25,918	36,007
Average	157,911	27,076	37,500

 

 

End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Saji George Titus

 

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