HUL’s demand woe is a sticky issue

Weak demand, coupled with persistent food and commodity inflation, remains a challenge for both HUL and its consumers. Stubborn food inflation continues to weigh on urban demand, limiting the company’s margin expansion prospects. As a result, HUL’s gross margin for Q2FY25 contracted by 150 basis points to 51.6%, reflecting the pressure from rising commodity costs. (One basis point equals one-hundredth of a percentage point.)

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Despite solid double-digit growth from its premium skincare products, HUL’s overall personal care portfolio recorded a low single-digit volume decline in Q2, as the company resorted to price hikes to manage input cost inflation. Similarly, the food and refreshments segment reported a volume decline, particularly in tea, which faced an unprecedented 25% year-on-year inflation in Q2. 

“Contrary to expectations, HUL’s competitive actions or new formulations in tea and soaps failed to drive volume growth or market share gains in Q2,” noted Kotak Institutional Equities in a 24 October report.

A significant portion of HUL’s portfolio, including home care and beauty & wellbeing products, posted 7-8% underlying growth and gained market share. However, the return of price growth remains critical, with management projecting only low single-digit growth for the second half of FY25.

The management’s commentary on demand offers little optimism, as hopes for a festive season recovery have been tempered. HUL now expects underlying volume growth to hold steady at current levels, revising earlier projections of gradual improvement. Ebitda margins are likely to remain range-bound in the near term, with rising employee costs further eroding profitability. These challenges have prompted earnings downgrades from brokerages.

“HUL’s growth is quite polarised,” said IIFL Securities Ltd in a report on 24 October. “On the back of this result and weakness in demand trends, we downgrade our sales estimate for FY25-27 by 1.5%-3%, and Ebitda and EPS by 2-4%,” it added.

While HUL continues to push premium products by enhancing their value proposition, the strategy may not be enough amid a slowing urban demand and a sluggish rural recovery. The company’s premiumization efforts alone are unlikely to drive the growth narrative, and the market appears to be taking notice. In calendar year 2024 so far, the HUL stock has declined 7%, underperforming the Nifty FMCG index, which has delivered a modest 2% return.

The company’s decision to separate its ice-cream business has also dampened investor and analyst sentiment, despite the segment’s muted growth in Q2FY25. Contributing 3% to HUL’s total turnover, the ice-cream business is highly capital-intensive and operates on thin margins. But despite high growth opportunities, a different operating model and a distinct channel landscape, the ice-cream business limits synergies with the rest of HUL, a Nuvama Research report said on 23 October. Its separation will help the company focus better on its core business.

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However, what may be good for the company might not be good for its stock, because the same report says that “exiting the ice cream business is not the best option. We believe ice cream is a high-growth business, and HUL is a strong number two player.”

At FY26 price-to-earnings, the HUL stock is trading at multiple of 48x, showed Bloomberg data, which is expensive in the current scenario.