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Related tags Unilever India
HUL recently published its Q3 FY2033 financial results (for the quarter ending December 31 2022), announcing an overall 16% growth year-on-year to INR149bn (US$1.8bn) and 12% growth in profits to INR25.1bn (US$303.3mn).
In the HUL Earnings Call open to media attendance earlier this year, the firm’s leaders emphasised that the impacts are of inflationary challenges are still apparent although these have softened in some areas, but that HUL is maintaining a positive outlook based on recent recoveries.
“This year, the FMCG industry witnessed unprecedented inflation across a wide basket of commodities led by supply side issues [but] lately we have seen a few key commodities soften, such as palm oil [for which inflation has decreased by some] 30% compared to the same quarter in 2021,” HUL CEO and Managing Director Sanjiv Mehta told the floor.
“With this, we believe that the year-on-year inflation is moderating gradually from its peak and the consumer price inflation has also softened in recent months.
“That said, commodities remain at a elevated level when compared to long-term averages [which is evident] when looking at inflation from a two-year lens – crude oil, food ingredients and other commodities are still seeing close to 100% inflation compared to the same quarter of 2020.
“This has been further compounded by currency, where the US dollar has appreciated by over 10% versus the Indian rupee this year – but overall, if commodities remain where they are, we expect the inflationary pressure to moderate gradually and this augurs well for the industry.”
Despite this optimistic outlook, Mehta acknowledged that the impacts on various food and beverage categories such as the firm’s much-touted Health Food Drinks (HFD) or beverage-based nutrition category that primarily comprises the Horlicks and Boost brands, cannot be denied.
“If not for the inflation, we would have gotten the results [in terms of business growth] for the HFD business similar to how we grew the Detergent and Home Care business in previous years by now,” Mehta said.
“It took about five to six years to see the results in the laundry sector [but] I don’t believe we will need to wait quite so long to see results for HFD, it should be much earlier.
“[This whole sector] was impacted by a number of increases such as in barley prices by 120% and skimmed milk powder by 50% over the last two years and this made a significant impact, otherwise we would have achieved this much earlier.
“So if the commodity prices are [positively impacted] by, say, a certain stimulus to deflate these prices, then we'll start seeing a much higher growth in HFD come in much earlier.”
HUL CFO Ritesh Tiwari stressed that the reason for this lies in consumer conversion, which ultimately comes down to pricing.
“Today the conversion is happening in terms of [market share] and this happens when we increase the penetration, where we bring more consumers into the fold,” he said.
“But then what happens at the middle-class level [during inflation], consumers who are using the bigger pack sizes, they start to reducing the consumption to manage their budget [which has affected consumption].
“As that eases, this will go back [and we also work to] build increased consumer relevance for the category – there’s the Plus range which gives higher order benefits and science-based benefits, and Horlicks which has different price points and pack sizes sold to and experimented by different consumers.”
Although HUL is considered the arm of Netherlands-based Unilever in India, the co-operation between both entities is based on a royalty and central service arrangement, which HUL recently renewed with Unilever for a further five years.
“HUL’s previous trademark and technology license and central service agreement with Unilever was signed in January 2013 for a period of 10 years, which granted us [the key rights to] use Unilever-owned brands, access Unilever’s technical know-how, R&D and innovation capabilities, as well as leverage Unilever’s expertise and services across various functions,” Mehta said.
“The contract expired on January 31 2023, and Unilever requested a review [with] India being one of its top three priority markets [and after] a detailed evaluation and due diligence on our part, the HUL board has approved the new agreement effective February 1 2023 for a tenure of five years.
“This new arrangement envisages a staggered increase of 80bps over a period of three years fro 2.65% to 3.45% of turnover [but is] a necessary investment that positions HUL well to continue delivering consistent, competitive, profitable and responsible growth.”
Mehta also addressed concerns regarding the shortened contract period and increased royalties to go to Unilever, stressing that these were necessary moves in this era to maximise flexibility and innovation capability.
“The world is very volatile and we are living in times which are very different so in these times, it’s good corporate governance to lock in the contract for five years,” he said.
“As situations change, we’ll improve in different directions accordingly, and will then have a chance to revisit the terms we are agreeing to, which is why this time the agreement has been for five years.
“The royalty has a few subcomponents to it – a royalty for trademark for using Unilever brands, for the technology we are getting from Unilever and then a large component for central services from digital marketing to other capabilities and technology [so that these benefits] will continue to come to our business.”
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