Manufacturers of consumer goods, such as HUL, have been raising prices to offset increased energy, packaging, and transportation costs. With Russia’s invasion of Ukraine inflaming commodity and supply chain prices even further, HUL anticipates commodity prices to decrease after the Ukraine situation is handled. The corporation, which has traditionally avoided providing profit projections, cautioned that margins will be squeezed in the near future. “We have a really robust business model with a 25% Ebitda margin, but it doesn’t imply it will expand in a linear fashion all of the time.”
India must avoid becoming “entrapped” by stagflation, according to Hindustan Unilever (HUL) managing director and chief executive Sanjiv Mehta, who also urged the government to expedite the front-loading of the Rs. 7.5 lakh crore set aside for capital investment in the budget.
Stagflation is a term used to describe a recession-inflation condition in which inflation is high, economic growth slows, and unemployment is consistently high.
“Inflation is undoubtedly having an influence on spending, and we must avoid falling victim to stagflation.” The Reserve Bank would be walking a tightrope (of India). They’ll have to make sure there’s enough liquidity, that growth isn’t stifled, and that inflation doesn’t spiral out of control,” Mehta added.
Private consumption and private capital spending both needed to improve before the Russia-Ukraine crisis, and the two are, to some extent, intertwined, he noted.
“Until that happens, the government will have to be the primary driver of economic development,” Mehta added.
HUL, the country’s largest consumer goods manufacturer, saw a 10% gain in revenue, owing to price hikes, but volume growth – or the number of things people buy – stayed constant.
HUL’s success is seen as a barometer of Indian consumer mood.
The business cited higher pricing across the board for the overall market decline.
“Most Indians have meagre salaries. Add to that price hikes in a variety of items, including fuel, food oils, and cereals, not just in packaged FMCG. As a result, family finances intended for packaged FMCG expenditure are frequently cut, and customers titrate volumes by lowering the quantity of consumption or, in many situations, opt for low-unit price packs,” Mehta explained.
Crude and palm oil prices, which are major constituents in soaps, shampoos, and detergents, have jumped 60% in the last quarter compared to a year ago, and net material inflation has more than quadrupled in the last two years.
As a result, HUL’s gross margins declined 331 basis points (bps) during the quarter, with net material inflation in the January-March period being nearly 4.5 times that of the June 2020 quarter, showing that price increases had lagged
One tenth of a percentage point is referred to as a basis point.
Manufacturers of consumer goods, such as HUL, have been raising prices to offset increased energy, packaging, and transportation costs. With Russia’s invasion of Ukraine inflaming commodity and supply chain prices even further, HUL anticipates commodity prices to decrease after the Ukraine situation is handled.
The corporation, which has avoided providing profit forecasts in the past, cautioned that margins will be squeezed in the near future.
“We have a really robust business model with a 25% Ebitda margin, but it doesn’t imply it will expand in a linear fashion all of the time.” Margins are anticipated to fall during this era of rising inflation. “However, we remain optimistic that we will be able to recoup our profits in the future,” Mehta added.Despite strong commodity inflation and impact on rural demand, experts said HUL was able to maintain volumes and operating margins by cutting back on advertising and raising prices gradually.
However, rising crude and palm oil costs will continue to squeeze margins, and the firm will need to raise pricing in the short future to safeguard margins, they added.
“In such an inflationary climate, downtrading has taken a toll on rural volumes.” Furthermore, to promote new goods and categories, FMCG businesses would need to boost marketing expenditure to earlier levels. Though we believe HUL is best positioned within the FMCG industry to tackle these difficult conditions, we expect continuing volume and margin pressure in the coming quarters,” ICICI Securities noted in a recent investor note.
Consumers who downtrade buy cheaper items, smaller packages, or postpone consumption entirely.
With €5.6 billion in revenue, India is Unilever’s second-largest market after the United States and one of the best performances.
Unilever (HUL’s parent company) announced earlier this year that it will split into five separate companies — beauty and wellness, personal care, home care, nutrition, and ice cream – each with its own strategy, growth, and profit targets.
HUL claims that the new structure will provide the corporation more concentration, agility, and speed in decision-making, as well as a higher degree of accountability for Unilever.
“This should also convert into better and faster innovations for the Indian company,” Mehta added, noting that HUL’s success is interwoven