HUL Warns Weaker Margin To Persist On Rising Input Inflation

Hindustan Unilever Ltd. has warned of weaker margins in the near term as its key input—palm oil—is expected to remain "highly inflationary” at least till September after Indonesia imposed a ban on export of the commodity.

“On palm oil, the situation has been extremely volatile for quite some time and now with the restrictions on exports, there would be a short-term impact,” Ritesh Tiwari, chief financial officer at HUL, said in a post-earnings conference call. He, however, expects the ban to be short-lived as Indonesia will have to export the excess production of palm oil, that is also the country's largest source of revenue.

HUL is looking at alternatives to meet the supply gap after the world's largest producer of palm oil said that the ban will not be limited to palm olein, but would be expanded to crude palm oil and RBD palm oil among other products. The policy will start on April 28 until domestic prices ease.

Tiwari said the company will continue to take pricing action in the coming quarters. But higher prices would still hurt its margin, which contracted by 80 basis points to 24% in the quarter ended March. “Our margins will decline in the short term as the price versus cost gap increases," he said.

The maker of Dove soap increased prices by 10% between January and March compared with a 60% surge in crude oil and palm oil, 20% rise in packaging costs and 30% inflation in soda ash over the previous year. The company has seen a 4.5 times rise in inflation in seven quarters.

Elevated costs impacted volume growth. It remained flat in Q4 as against a 2% growth in Q3 and 16% growth in the same period previous year.

“In rural, volumes remain in the negative territory,” Sanjiv Mehta, chief executive officer at HUL, told reporters.

Mehta expects demand to start improving in the second half of this year driven by a timely monsoon and increased government spending.

A good Rabi harvest also augurs well for the rural economy, he said.

Even as the operating environment remain challenging, the company fared better than Nielsen estimates of a 1% value growth and 8% decline in volumes for the industry.

HUL gained market share in 75% of its portfolio with its turnover touching Rs 52,406 crore in FY22, according to the company's investor presentation. It had reported a turnover of Rs 47,028 crore in FY21.

Three of its brands—Rin, Vim and Dove—entered the Rs 2,000-crore club. New launches during the year contributed about Rs 900 crore to sales.