Hindustan Unilever Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Strong headline numbers, inflation still the story: Top line grew 16% with 4% UVG and over 75% of the business gaining share, but a 590 bps COGS increase from elevated commodities drove an 180 bps YoY EBITDA margin decline to 23.3%.
• Pricing playbook is working, but it is a two-speed playbook now: Management took price cuts in big chunks where palm oil corrected (tea, skin cleansing) while taking further sequential price increases where crude and soda ash kept inflating (home care, laundry).
• Premium portfolio is the growth engine, running at twice the pace of the rest: Premium brands grew 2x faster than the overall portfolio, with premium outpacing popular and popular outpacing mass, a trend management calls intuitive given inflation’s uneven wallet impact.
• Rural recovery is not here yet, and management wants more data before calling it: Volume declines remain steeper in rural than urban; while macro levers like government capex and a normal monsoon are in place, the single biggest variable is whether the broader commodity basket cools off.
• What to watch next quarter: Whether the promised sequential gross margin improvement actually materializes as the price-cost gap narrows, the pace of the dialed-up A&P investment, and any signal on rural volume stabilization.

Inflation & Margin Mechanics

• COGS hit was severe but concentrated: The 590 bps YoY COGS increase came from elevated commodities excluding palm oil, consumption of higher-cost inventory, and a 70 bps drag from higher consumer promotions. Palm oil was the one meaningful commodity correction during the quarter.
• Margin defense came from operating leverage and savings: Despite the COGS surge, EBITDA margin fell only 180 bps YoY and actually improved 10 bps sequentially. Management delivered a net 160 bps reduction between Other Expenses and Employee Costs, while product superiority investments ran at 2x pre-COVID levels.
• Employee cost uptick has three drivers, not one: Wage inflation in India, a variable pay true-up on robust first-half performance, and Unilever share-based compensation impacted by both Unilever’s share price movement and GBP-INR appreciation.
• A&P spend hit a multiyear low for a quarter at ~7%: Half the percentage improvement came from volume and growth leverage on a 16% top line, half from lower market heat in a high-inflation environment. Management insists share of voice stayed ahead of share of market.
• The price-cost gap should narrow sequentially: With crude remaining firm but vegetable oils cooling, management expects a slight improvement in the price versus cost gap in the December quarter, leading to sequential gross margin improvement.

Tiwari: "Despite this, we have been able to hold EBITDA margins at a healthy 23.3%, which translates to 180 bps year-on-year decline and 10 bps sequential improvement."

The Two-Speed Pricing Playbook

• Where commodities corrected, price cuts came in big chunks: Tea and skin cleansing saw meaningful commodity deflation, and management passed the benefit to consumers via large-bite price decreases to hold the consumer franchise and avoid trade inventory getting caught between price points.
• Where commodities kept inflating, price increases continued: Home care and laundry took sequential price increases in the September quarter because crude stayed firm at \$90+ and the strengthening USD pushed the INR-equivalent cost to ~\$100+, while soda ash saw meaningful energy and demand-supply driven inflation.
• The asymmetry is deliberate: When inflation hits, management takes price increases in small bites to land prices effectively and protect the consumer franchise. When commodities come off, it takes larger-bite decreases. This is described as a competitive edge built through the "science of pricing."
• Tea volumes grew mid-single digit but value growth was muted: The price cuts taken in tea meant in-quarter value growth understated the underlying volume momentum and market leadership cementing.

Tiwari: "If in the market inflation happens, we take price increases in small bites so that we are able to land those prices effectively and ensure that we are able to hold and keep growing consumer franchise. But conversely, whenever market commodities come off to some extent in select places, we take larger bite decreases."

Portfolio Performance

• Premium is structurally outpacing the rest: The premium part of the portfolio grew at twice the pace of the overall portfolio. Management sees this as intuitive: higher-income consumers are more resistant to inflation than those at the bottom of the pyramid.
• Market share gains are broad, not narrow: More than 75% of the business is gaining value and volume market share, with gains comprehensive across geographies, channels (GT, MT), and urban and rural markets.
• Food Solutions has doubled from pre-COVID levels: The institutional channel continues to scale up, supported by reopening of schools and offices.

Mehta: "Even if you look at it from a lens of market, premium is growing faster than popular, popular is growing faster than mass. This is a very clear trend and it is, in many ways, intuitive because people who have more money are a bit more resistant to inflation than people at the bottom of pyramid."

Rural Demand: Waiting for the Commodity Signal

• The volume decline is real and rural is worse: On a 3-year CAGR basis, both urban and rural markets are growing mid-single digit in value with marginal volume decline. On the latest 12-week and MAT basis, urban is outpacing rural and the volume decline in rural is steeper compared to urban.
• The single biggest variable is the broader commodity basket: Management believes the factor that will determine rural FMCG outcomes is whether commodities beyond vegetable oil cool off. If prices come down, that should help consumption and volumes.
• Macro tailwinds are assembling but not yet converting: Urban employment is increasing, which should drive rural migration and nonfarm income. The monsoon was normal, though spatial coverage was volatile and crop outcomes are mixed. The government is leaning in with fertilizer subsidies, fuel duty cuts, food grain subsidy extensions, and Rs. 7.5 lakh crore in capex investment.
• Management wants a few more months of data before calling a turn: September quarter data points were not materially different from the last few quarters. The commentary is measured and deliberately avoids signaling a trajectory change.
• Consumer down-trading is rational, not panic: In laundry, consumers shift to larger packs for better value. In other categories, low-price-point packs like the Re. 1 sachet, Rs. 2 pack, or Rs. 5 Horlicks sachet provide value. This is described as consumers seeking more value in times of very high inflation.

Tiwari: "I do believe the single biggest factor which will determine rural outcome as far as FMCG is concerned is the impact of commodity. If at all we see a broader basket of commodities cooling off the way vegetable oil has, that should help prices to come down."

Digital-First Brands & Innovation

• Two new digital-native brands launched in the premium beauty space: 'Acne Squad' is a specialist acne brand co-created with dermatologists across 11 SKUs and four platforms for different acne life cycles. 'Find Your Happy Place' is a mood-transforming experiential bath and body range with four fragrance families, launched in India as only the second market globally for this Unilever brand. Both launched through D2C websites and pure-play platforms.
• Horlicks is seeding new formats, not just pushing the core: Nutri Gummies and Diabetes Gummies were launched on digital platforms as seeding exercises rather than full-fledged launches. The Horlicks Plus range covering diabetes, bone health, women’s health, and lactating mothers is seeing good traction.
• Innovation velocity has structurally improved: Agile innovation approaches have halved the time to launch new products. Three nano factories provide flexibility to manufacture closer to demand in small batch sizes. Fourteen bespoke D2C platforms are now operational. Digital media contributes more than 25% of total media spends.
• The ambition is to keep launching where demand spaces are substantial: Management signaled this is not the first and last of digital brand launches; it will keep looking at trends and invest with a product portfolio when a demand space is large and relevant enough.

Guidance & Commitments

Key Metrics