Hindustan Unilever Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Volume-led recovery underway, but gradual: Revenue grew 7% balanced between price and volume, with rural volumes turning positive after a deep decline. Management expects price growth to flatten or turn marginally negative, making volume the sole growth driver for the next few quarters.
• Gross margin rebuild is the priority: Gross margin recovered 400 bps from its September 2022 trough, with 140 bps added this quarter to 49.2%. The single most important P&L line going forward; the tailwind will be split between further margin rebuild and competitive A&P investment.
• Competitive intensity is returning: Small and regional players, who vacated during peak inflation, are re-entering select categories and price points, particularly in Tea and Laundry. HUL's aggregate market shares remain ahead of pre-inflation levels, but certain mass-segment pockets saw dips.
• The price-to-volume transition takes 2–3 quarters: Price cuts in Skin Cleansing and Laundry must work through trade destocking (1–3 days of inventory) and consumer pantry stocks before consumption volumes respond, a pattern consistent with prior commodity cycles.
• What to watch next quarter: Whether the monsoon and El Nino disrupt rural demand recovery, the pace of volume conversion as price cuts reach consumers, and how aggressively HUL deploys the gross margin tailwind into A&P to defend shares against returning local competitors.

Demand Environment & Volume Recovery

• Urban leads, rural turns: Urban markets continue to lead growth, while rural volumes turned positive after a double-digit decline. On a 2-year CAGR basis, total volume growth remains marginally negative, with rural still declining 4%.
• Cumulative inflation still bites: Consumers absorbed a 22% price increase over two years, which hit discretionary categories like mass Skin Care and Health Food Drinks hardest as households prioritized kitchen essentials. Income levels have partly caught up, and moderating inflation is now supporting rural demand.
• The pipeline lag: Price reductions go to the trade first, which must clear higher-priced inventory before stocking lower-priced goods. Consumers then use up higher-priced pantry stock before experiencing lower prices and increasing consumption. This transition typically takes 2–3 quarters.
• Weather is the single identified risk: El Nino has set in early and could impact the latter part of the monsoon, with rice and pulse cropping already affected. Higher reservoir levels and better agri infrastructure should contain the impact, but recent floods in parts of the country add uncertainty.

Ritesh Tiwari: "That is one element is what we called out as part of unknown and all of us need to learn and we can watch out. We did see some floods in parts of the country in the last few weeks. So that is also a reality we are facing at this point in time. And this is why the only single business risk we called out is weather — everything else is looking good."

Competitive Dynamics & Market Shares

• Small players return: During high inflation and volatility, small and regional players vacated the market. With commodities now moderating, more are participating again, concentrated in the lower price points of Tea and Laundry.
• Share position resilient: More than 75% of the business is winning market shares. Aggregate shares today are higher than before inflation began, driven by significant outperformance during the two-year inflation period when competitors vacated. Certain mass-segment pockets and specific regions saw dips due to the resurgence of small players.
• Tea downgrading is category-specific: The widening gap between premium tea and loose tea prices has driven consumer downgrading, a dynamic unique to Tea. Elsewhere, consumers are seeking value through uptrading or downtrading but not downgrading. HUL has brands like Taaza positioned for this segment.
• Media intensity normalizing: Media deployment is now at 95% of the June 2019 quarter level, with an increasing share of digital spend. Management expects media intensity to further increase in the near term as the priority is keeping Share of Voice ahead of Share of Market.

Gross Margin & Investment Strategy

• The 400 bps rebuild: At peak inflation in September 2022, gross margin was compressed by 600 bps. HUL has recovered 400 bps over the last three quarters, with 140 bps added sequentially this quarter to reach 49.2%. A good portion of that recovery was reinvested into A&P, which rose from ~7% to ~10% of sales.
• A&P stepped up aggressively: A&P investment increased by 110 bps versus the March 2023 quarter, an additional spend of almost ₹200 crores. The explicit strategy is to keep building gross margin and invest competitively behind brands; EBITDA margin for the next few quarters will be an outcome, not a target.
• Other expenses under scrutiny: Other expenses rose year-on-year due to salary inflation, capability investments, and the new royalty and central services arrangement. Management emphasized a frugal mindset and noted HUL operates at the lower end of the industry benchmark on this line. Restructuring expenses were also incurred in HFD to drive better supply chain cost structures.

Ritesh Tiwari: "We are extremely economical the way we run. We have a frugal mindset, any cost, which is adding value to consumer gets prioritized. Everything else we have extremely frugal mindset."

Category Performance

• Skin Cleansing share dynamics: HUL lost shares earlier in the decade by vacating an unprofitable lower-end segment. Learnings around product superiority and Winning in Many Indias (WiMI) were deployed: LUX is now sold differently across North, East and South with distinct fragrance, proposition and mix. In the last couple of years, HUL grew ahead of the market and gained shares.

Rohit Jawa: "Skin Cleansing is a heartline of our business. We've all grown up in this company selling a Lifebuoy. So that is really, really close to all of us."

Portfolio Strategy: Premium, Core & Market Development

• Dual-engine growth: The core mass portfolio drives baseline through the right price-quality equation and WiMI. The premium end, roughly one-third of the business, is growing faster and is the focus of innovations, A&P spends, market development and portfolio expansion. Both ends receive focused attention.
• Category creation as genetic code: Management's thesis of growth rests on primary-level market development and category growth, citing India's long runway. Examples include TRESemme built on the salonization trend, Lakme serving the emerging beauty segment, and Body Wash as a market development cell within Skin Cleansing.
• HFD integration progressing: Go-to-market is fully integrated and the business is onboarded. Sachets and small price point packs have been launched, Boost has been activated nationally, and the plus range backed by high sciences is seeing good growth. Inflation has been a spoilsport, with COVID and then high inflation impacting HFD growth. Restructuring investments are ongoing to drive better supply chain cost structures.

Rohit Jawa: "I think our thesis of growth continues to be at the primary level market development, category growth because that's a story of India for the next many, many years to come. So yes, it is a part of our genetic code."

Commodity & Inflation Outlook

• Divergence across baskets: Input materials for Home Care and BPC (crude, palm derivatives) remain benign. Foods & Refreshment commodities (coffee, cereals, skimmed milk powder) continue to witness high year-on-year inflation. Most commodities remain above historical averages.
• Sticky inflation pockets: Milk, cereals (mostly barley), and coffee have seen substantial inflation. The HFD category is particularly impacted by milk inflation. Management expects these to be cyclical and to start deflating in time.
• Price growth to flatten: If commodities remain at current levels, price growth is expected to be near flat or marginally negative. Growth for the next couple of quarters will be fully led by volume. Over the long term, FMCG industry equilibrium is roughly one-third price and two-thirds volume growth.

Guidance & Commitments

Key Metrics