HUL Expects Inflation To Rise, Warns Of More Price Hikes

Cost of raw materials such as crude oil, milk extracts, coffee and barley remain at high levels putting pressure on HUL's margins.

<div class="paragraphs"><p>HUL products. (Source: BQ Prime)</p></div>
HUL products. (Source: BQ Prime)

Hindustan Unilever Ltd. continues to face a double whammy of subdued demand and elevated costs, which is likely to dent margins in the current quarter and result in further price hikes, according to CEO Sanjiv Mehta.

“Inflation hasn’t gone away…most commodities remain elevated and there is now another factor that is rupee depreciation which would impact commodities and increase input costs for us,” Mehta told reporters in a post-earnings call on Tuesday.

Even as palm oil prices fell from its peak, the operating conditions continue to be impacted by inflation in several other commodities, such as crude oil, milk extracts, coffee, barley, polyethylene, caustic soda and vegetable oil.

“With most commodities remaining elevated and consumption of higher cost pipeline inventory, the September quarter will see more inflation than the June quarter, and margins will remain under pressure,” said Ritesh Tiwari, chief financial officer at HUL.

Businesses typically operate with 4-12 weeks of inventory depending upon the material. According to Tiwari, the correction in spot prices will not immediately reflect in the books as HUL has already booked inventory. Hence, the positive impact of lower palm oil prices and potential softening of other commodities will be seen from the December quarter onwards.

There is a wide gap between price and cost.

The net material inflation was 20% of total cost, while the price growth stood at 12% in Q1, according to the company.

“We expect net material inflation in the December quarter to be lower sequentially, but we would need to wait and watch how the commodities play out in the next few months to get a sense of the exact quantum of reduction,” Tiwari said.

The price of crude oil was up 60% year-on-year in the June quarter, according to the company presentation.

Caustic soda prices were 125% higher, while polyethylene and palm oil were up 25% and 50%, respectively, over the previous year.

As cost pressure persists, the management said it could look at further calibrated price hikes in “select categories” to cushion margins.

High inflation is impacting consumption across rural and urban markets. "On a year-on-year basis, the market growth has been led by prices while volumes have declined. Compared to pre-pandemic levels, the volumes remained flat and rural markets continue to lag urban (markets),” said Tiwari, adding that the growth in the near-term will remain price driven.

Sales of the company's home care products, including brands such as Surf Excel and Vim, jumped nearly 30% to Rs 4,931 crore, while the beauty and personal care segment grew 17% to Rs 5,364 crore. Food and refreshments category grew 9% on a high base to Rs 3,627 crore, according to the company.

The fast-moving consumer goods segment fell 5% in the three months ended June. The sector is now pinning its hopes on the forecast of a normal monsoon and higher farm income to tide over the slowdown.

"There are certain pockets, especially the central belt, where the rainfall has been less than average. But if that catches up, it will augur well for rural consumption," said Mehta.

He expects government initiatives, such as higher fertilizer subsidy, to result in higher net income for farmers, spurring consumption.