Hindustan Unilever Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Muted demand, stable outlook: Underlying sales grew 2% in H1 FY25 with 3% volume growth, as urban markets moderated and rural recovery remained gradual. Management expects demand trends to stay stable with no near-term acceleration.
• Gross margin under pressure: Gross margin declined 150 bps YoY to 50.4% as commodity inflation returned; the company is now taking calibrated price increases across Tea and Skin Cleansing after three quarters of flat or negative pricing.
• Personal Care remains the problem child: The segment declined 5% with Skin Cleansing hit by both negative pricing and muted volumes. Four corrective actions are underway but management says it needs "a couple of more quarters" for full impact.
• Ice cream separation formally announced: The Board concluded to separate the ~3% of turnover business, which is high-growth but high-investment and low-margin. Route decision (sell vs demerge and list) expected by year-end.
• What to watch next quarter: Whether tea price increases stick without destroying volumes, whether soap formulation changes translate to volume market share gains, and whether urban demand stabilizes or weakens further.

Demand Environment

• Urban slowdown, rural recovery: Urban growth has trended down in recent quarters while rural has been ahead of urban for several quarters. Smaller cities and rural growth remain good; big-city growth is trending down, possibly due to base effects and macro factors.
• Market volume trajectory: At the MAT level, total FMCG volume growth slowed slightly in recent months. Urban growth moderated since MAT June; rural growth became accretive but the pace of recovery is gradual.
• Near-term view: Management expects demand trends to be stable going into the current quarter, with no further acceleration. They remain watchful of real rural wage growth, food inflation, and employment levels.
• Longer-term expectation: Management expects the market to trend to mean with a few percentage points of price growth returning as inflation takes shape in some categories. Volumes should trend at natural organic levels of 3-4%.
• Premiumization sustained: Premium segments continue growing ~30% faster than other segments. The upgradation trend (e.g., Re.1 sachet to Rs.2 Dove, Surf Excel INR10 sachet in rural) remains consistent and secular.

Rohit Jawa: "urban growth has trended down in the recent quarters or recent quarter. And while rural has continued to grow gradually and has now for the past few quarters has been ahead of urban, and also continues to be ahead of urban this time."

Segment Performance

Pricing & Commodity Inflation

• Inflation is back: After three quarters of negative price growth, underlying price growth was flat this quarter. Commodity prices have increased and management assesses that inflation is persistent and "here to stay."
• Calibrated price increases underway: The company is taking calibrated price increases, particularly in Tea and Skin Cleansing. Net of savings, net inflation will be priced. Low single-digit underlying price growth expected in the near term if commodity prices remain where they are.
• Tea inflation at 25%: A deterministic signal that this season is inflationary due to lower produce. HUL had not taken material price increases in the September quarter, waiting for clear signals on direction and quantity. Price increases have now started in the December quarter, with the first set of packs already being invoiced.
• Soap pricing: With commodity price changes (crude palm oil, other ingredients), calibrated price increases will be taken over the course of the quarter to negate net impact of inflation, mindful of competitive price-value equation.
• Crude oil vigilance: Recent volatility in crude oil prices due to geopolitical tensions is being watched; management remains vigilant for any price fluctuations that seem to persist.

Ritesh Tiwari: "Our learning always has been when you take price increases take in smaller chunks. And when you drop prices drop in larger chunks, so that you don't end up getting saddled with trade pipe line inventory."

Personal Care Turnaround

• Four actions deployed: (1) Upgrading product superiority via Stratos technology (Lux, Lifebuoy); (2) Correcting price points at March end, creating negative YoY pricing in September quarter; (3) Innovation (Dove sensitive, Lux Sandalwood, Dove Serum range); (4) Upping game in organized trade.
• Stratos technology: Revised soap formulation fully distributed in market for ~5 months. Early read encouraging with positive consumer feedback across geographies. Formulation is superior with more investment (higher cost), not increasing gross margin. Over 20 patents applied for (design, material, formulation); took 5 years to develop.
• Sequential improvement visible: September quarter sold more turnover than June quarter; early signs of volume market share improving. But management wants to watch for a couple of quarters before concluding, with more deterministic data expected by end of next quarter.
• No timeline commitment: When asked whether soap YoY volume growth will turn positive in Q3, management listed the four actions but gave no direct yes/no, nor a specific condition for when growth would turn positive.
• Mass skin care (Glow & Lovely): Still has work to do; needs to come back to momentum. Clear set of activities in motion, going into market this quarter and next.

Ritesh Tiwari: "we have applied for more than 20 patents, and these are all kind of patents, design patents, material patents, of course, formulation. And we do believe that, with that we will have basically a formulation, which will be very tight in terms of its development and in terms of proprietary nature of that."

Ice Cream Separation

• Board decision: The Board concluded to separate the ice cream business. Ice cream is roughly 3% of HUL's turnover, high-growth but equally high-investment and low-margin. Limited synergies with the rest of the business; distinct go-to-market, supply chain, and point of sales. Brand and technology owned by Unilever with a royalty contract.
• Two routes: Either sell or demerge and list. Key objective is to maximize shareholder value and minimize business disruption. Decision on route expected by end of the calendar year.
• Unanswered: When asked why ice cream is being separated now while tea was retained years back despite similar arguments, management did not directly address the comparison. When asked whether HUL will retain any stake post-separation, management said the route decision is pending and did not confirm zero stake.

Ritesh Tiwari: "ice cream is roughly 3% of HUL's turnover. It's a high growth, but equally high investment and low margin business for us."

Competitive Position & Distribution

• Market share momentum: MAT business winning number crossed 60% in September, ahead of the earlier estimate of December 2024. Gaining market shares in the last 3 months per latest Nielsen numbers. Lost some inconsequential share during the deflation cycle but held on to most of the 200 bps share gain since March 2021.
• Brand power: Circa 75% of brands gaining or maintaining brand power; value-weighted distribution above 95%. More than 70% of portfolio assessed under Unmissable Brand Superiority; more than 80% of turnover is unmissably superior vs competition.
• Shikhar platform: Over 0.14 crore stores onboarded, more than 70% transacting monthly. Stores on Shikhar growing faster with better assortment vs non-onboarded stores.
• Channel dynamics: E-commerce and organized trade delivering double-digit growth; gaining healthy market shares in e-commerce and beauty.com channels. Quick commerce serves convenience/instant-need occasions with a segregated portfolio; market shares roughly mirror grocery/GT share.
• Channel profitability: Organized trade typically yields better margins than general trade because the portfolio sold is different (higher price point packs, fewer sachets/mass segment products). Management declined to share further detail on profitability differences across channels.

Margins & Investments

• Gross margin decline: Gross margin at 50.4% declined 150 bps YoY primarily due to increase in commodity prices.
• H1 FY25 profitability: EBITDA margin up 10 bps; PAT (bei) grew 3%, PAT grew 2%.
• EBITDA margin stance: Management wants to maintain EBITDA margin at current healthy levels (23.8%); some bps up or down is acceptable. Continued focus on driving gross margin and stepping up A&P investments.
• A&P spend: Absolute A&P spend was roughly over 9.5% vs typical 10.5% (100 bps lower), partly due to a high base (same period last year was the highest A&P spend in 3 years). This is more a phasing issue; management expects to operate at roughly 10.5% levels going forward unless media heat or innovation phasing changes dramatically.
• Dividend: Board approved interim dividend of INR19 per share and special dividend of INR10 per share; total payout INR6,814 crores.

Guidance & Commitments

Key Metrics