Stock Review: HUL & ITC

   The June quarter results of the two leading consumer firms— HUL and ITC — in a way confirm the RBI's recent assessment that there is no slowdown visible yet in consumption and that consumer demand is still holding on. However, this may be only partly true as these consumer goods companies recorded their volume-driven growth in the face of several challenges. The impact of that is reflected in the fact that there has not been any growth in operating profit margins.

HUL posted a 15% growth in its domestic business and a 11% growth in operating profit driven by a double-digit revenue growth across all its segments. Despite the strong growth, there are certain telltale signs of stress. After five consecutive quarters of double-digit volume growth, the company reported a single-digit volume growth of 8%. Besides, general consumer confidence being low, price increases on selective products during the quarter seem to have impacted its volume growth.

As in earlier quarters, the soaps and detergents category continued to be a laggard. The segment witnessed a very low volume growth and posted a YoY drop in profits and margins. Packaged foods also witnessed a drop in margins due to a rise in prices of food items. Operating profit margin dropped by 50 bps to 13.7%. Clearly, rising raw material costs are eating into HUL's margins. Input cost as a proportion of sales rose to 56% from 51% in the same quarter last year. The company has tried to rationalise costs by cutting down on ad spends.

The other top FMCG company — ITC — also posted strong growth in its first quarter results marked by a growth of 20% in net sales and operating profit, respectively. All business segments registered a double-digit revenues growth. The profitability of its non-cigarette FMCG business improved as losses posted by it in the June quarter have reduced YoY. Unlike HUL, it could manage to boost margins in all segments, except the agri business. However, overall operating margins remained flat at 34% due to high input cost. At 28%, raw material cost rose much higher than the increase in revenues.

The June quarter show of HUL & ITC raises the moot point as to whether these firms can sustain this show, going forward. That is because of the headwinds in the form of rising interest rates which may prompt consumers to spend less, input cost inflation and intense competition in high clutter categories such as soap, laundry, home and personal care.