Hindustan Unilever Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Volume recovery is gradual, not sharp: Rural volumes grew 8% YoY but on a soft base, with 2Y CAGR still at minus 1%. Urban and modern trade lead, while rural demand remains subdued. Management is cautiously optimistic, citing moderating inflation and the upcoming festive season.
• Gross margin back to pre-inflation levels: Gross margin improved 700 bps YoY to 52%, driven by lower input costs and cost reduction efforts. EBITDA margin expanded 130 bps YoY to 24.6%, though this included a one-off indirect tax litigation credit.
• Competitive intensity is rising: Small and regional players are resurging in select categories like Tea and Detergent bars as commodity prices soften. Media intensity in the category jumped over 20% YoY, and HUL stepped up A&P by ₹700 cr to defend share of voice.
• Price growth is turning negative: Market price growth fell from 8% in June to 3% in September. HUL expects its own price growth to be marginally negative in the near term if commodities stay where they are, as it passes lower input costs to consumers.
• What to watch next quarter: Whether the festive season delivers the expected volume uptick, how quickly the price-growth-to-volume-growth transition stabilizes, and whether small-player competition recedes as commodity prices find equilibrium.

Demand Environment

• Rural still fragile: Rural volumes grew 8% YoY against a 6% decline last year, but the 2Y CAGR remains minus 1%, an improvement from minus 4% in the June quarter. Real rural wages are just entering positive territory, and government capex in construction is helping, but an uneven monsoon with a 6% deficit and lower reservoir levels could weigh on the Kharif harvest.
• Urban holds the baton: Urban and modern trade continue to lead growth, with large packs outperforming. The premium portfolio in Fabric Wash grew double digits, and future formats like serums and bodywash are scaling well.
• Downgrading in select categories: Tea saw consumers downgrade from premium to mass and loose tea as the price gap between Plainer and Premium Tea widened. Similarly, in detergent bars, small players gained share at the mass end. This mix shift creates a short-term volume-value disconnect for HUL, which over-indexes on premium.
• Channel destocking nearly done: HUL has finished its pricing actions this quarter. Assuming industry price growth moves from 3% to zero, the transition should stabilize next quarter unless commodity volatility returns.

Ritesh Tiwari: "When commodity cost goes up we take price increases in smaller chunks. When commodity cost comes down, we take decrease in larger chunks so that we don't disrupt trade pipeline with frequent changes in pricing."

Competitive Dynamics & Market Share

• Small players are back: In detergent bars and tea, as commodity prices softened, small and regional players who vacated during peak inflation have re-entered and are growing ahead of large players. Management views this as cyclical, expecting equilibrium to return in a couple of quarters.
• Volume vs value share divergence: HUL is gaining volume share in over 75% of its business but value share in only about 60%. The gap reflects mix deterioration: consumers trading down within HUL's portfolio (e.g., from premium tea to Taaza) means more tonnes sold at lower value per tonne.
• Media intensity surged: Aggregate media deployment in HUL's categories rose over 20% YoY. HUL responded by stepping up A&P by ₹700 cr, a 420 bps increase vs the September quarter last year, partly amplified by a low base when GRPs were cut during peak inflation. The elevated spend level will remain firm given competitive intensity.
• Pricing as a competitive tool has limits: Asked why HUL does not cut prices more aggressively given the 700 bps gross margin expansion and market share pressure, management pushed back, calling it a complex set of decisions where price cuts do not guarantee growth.

Ritesh Tiwari: "it can never be a uni-dimensional view that cut price will get more growth, only if life was so simple."

Segment Performance

• HFD margin context: The 31% underlying EBITDA cited at acquisition included income from the Haleon consignment selling arrangement, which ends November 2023. That income was over ₹300 cr last fiscal. Most cost synergies are unlocked; some manufacturing efficiencies remain over the next two to three years.
• Tea category decoupling: Plainer Tea prices moderated more than Premium Tea due to better crop, widening the price table. Consumers downgraded toward loose tea and smaller players. Within HUL, Taaza saw more traction than premium teas.

Margin Walk & Investment

• Gross margin milestone: Gross margin recovered to 52%, back to pre-inflationary levels, driven by narrowing price-versus-cost gap and cost reduction programs.
• EBITDA margin: At 24.6%, up 130 bps YoY, but includes a one-off credit from favorable resolution of an indirect tax litigation, entirely in Beauty and Personal Care. Excluding this, underlying sales growth would have been 3% with flat price growth, and PAT growth 7%.
• A&P stepped up sharply: ₹700 cr YoY increase, a 420 bps rise, to ensure share of voice stays ahead of share of market. The split is roughly one-third digital, two-thirds traditional, and predominantly advertising-driven. This elevated level will sustain.
• Symphony savings fuel reinvestment: The Symphony program drives savings across all lines of the P&L. Management intends to step it up further, with the full intention of reinvesting back into A&P, capability building (Shikhar, Reimagine HUL), product superiority, and portfolio development.

Rohit Jawa: "While our value creation is more driven by top line, we do want to inch up the margin to increase fuel for growth."

Strategy & New CEO Priorities

• Six thrusts articulated: (1) Grow the core 19 large brands through product superiority and WiMI-led execution. (2) Build categories of the future via market development and premiumization. (3) Transform parts of the portfolio to on-trend demand spaces, especially in beauty and foods. (4) Win in channels of the future through tailored portfolio and design-to-channel. (5) Structurally reset the cost base to generate fuel for growth. (6) Sharpen distinctive capabilities: WiMI, digital, sustainability, and a culture of innovation and intelligent risk-taking.
• Market development bets: HUL has identified specific bets (premium formats like sun care, serums, shower gels, face wash) and will stay multiyear committed, replicating the Fabric Conditioner playbook.
• Skin Care and Color Cosmetics: Management is very excited, citing strong master brands (Lakme, Ponds, Indulekha, Dove, Glow & Lovely) and high relative market share. More effort will go in this direction.
• Shikhar as a strategic moat: The e-B2B app now has over one lakh Shakti entrepreneurs onboarded. The Shikhar Seller app pilot on ONDC is live in New Delhi and Bengaluru across about 60 outlets, letting kirana stores sell their entire catalogue online. Scaling will follow based on retailer feedback.
• Strategy evolution underway: Rohit Jawa, in his first earnings call as CEO, said he will sharpen the agenda over the next few months and provide more detail on what changes it means.

Rohit Jawa: "I'm particularly excited with taking the strengths we have forward and then we are evolving some more to be ready for the future."

Guidance & Commitments

Key Metrics