HUL Faces Uphill Battle With Static Demand, Price Cuts Fail To Move Growth Needle—Profit Insights

The recovery in the mass segment has been slower than anticipated, mainly due to high food inflation during the quarter, the Surf Excel maker told analysts in a recent meeting. The management of the company noted that the pickup in discretionary products was also slow.

Harsh summer, coupled with price cuts, aided HUL's first quarter performance. But a subpar consumer demand in the ensuing quarters has stalled growth. In categories such as tea and soaps, the company has been steadily losing market share to regional competitors. It has cut prices to protect its turf, but the strategy hasn't boosted volumes materially, analysts say.

"HUL's tea segment has been facing a downtrend amid inflationary pressures," Motilal Oswal Financial Services Ltd. said citing analyst discussion with HUL management.

Peer Tata Consumer Products Ltd. recently raised the price of its Agni tea by 7% and even regional competitors such as Society Tea, Wagh Bakri and Girnar have increased tea prices by 3%. Rising inflation in tea prices has driven consumers to shift to lower-priced brands. To woo customers, HUL has introduced a promotion offering an additional 10% volume on its 500-gram pack of Brooke Bond Red Label tea in August. Despite refraining from price hikes, HUL continues to see a decline in this category. Although, the company managed to gain some market shares from organised peers.

In soaps, HUL is losing market share to unorganised players. The company has slashed prices in select soap packs during the second quarter, reflecting the easing in palm oil prices from peak levels. For instance, a 125 gm Lifebuoy Total now costs Rs 29, which is 9% cheaper.

But the recent hardening of palm oil prices has led to companies gradually taking price hikes in select packs. Godrej Consumer Products Ltd. has taken low single digit price hike in the portfolio in Q2, according to traders.

Analysts say that HUL seems to be delaying price hikes in a bid to recoup its lost market share. "After GCPL effecting price hike, HUL has not taken any action, which in our view would help HUL gain share," said Nitin Gupta, senior research analyst, Emkay Global Financial Services.

Similarly, HUL took price cuts in Taaza tea and has gained share from Tata Consumer, Gupta said. In coffee, too, Nestle India Ltd.—being the category leader—has initiated price hikes across its portfolio amid a surge in coffee prices, but HUL is reacting with a lag, with focus likely to corner some market share, he added.

HUL's nutrition segment, which includes Horlicks and Boost, also continues to be impacted by inflationary prices of milk.

HUL's premiumisation efforts, meanwhile, are proving fruitful as the company has gained a 300 basis point increase in its premium portfolio over the past three years.

The company is also getting disruptive in soaps with Stratos—a first of its kind technology built in India and patented worldwide. This proprietary blend uses 25% less palm oil replaced by a mix of plant-based ingredients such as polysaccharides, vitamins and natural fatty acids.

"Lesser palm oil in our soap, combined with use of sustainable palm, drives a multitude of benefits from reduced reliance on a forex dependent commodity to reduced imports and reduced greenhouse gas emissions," said HUL Chief Executive Officer Rohit Jawa.

"Our ground checks suggest that the new formulation soaps are active pan-India since last 3-4 months. We expect positives in the form of market share gains to be visible in the medium term," said Gupta.

According to Abneesh Roy, executive director, Nuvama Institutional Equities, while competitors such as Godrej Consumer might develop similar technology, "this move by HUL provides an opportunity to regain market share in soaps and puts margin pressure on its competitors".

Currently, HUL controls 38% of the Rs 40,900-crore soap market.

The company has taken price hikes in categories like oral care and shampoo. An Emkay report showed that the company has taken a 4% hike in Closeup to catch up with high aggression from Patanjali and Dabur. It has also initiated price hikes of 5-6% for its premium offerings under Pepsodent.

Within shampoo, HUL has taken high single-digit price hikes for its mass-end shampoo offerings under brands Sunsilk and Clinic Plus. Price actions for brand Dove remained in a low-to-mid single digit, while other category incumbents have largely maintained product prices.

HUL is focused on reshaping its portfolio to prioritise high-growth areas, specifically targeting categories like home care, liquids and beauty.

The company has been at the forefront of transitioning consumers from detergent powders to liquid options. Several brands have aggressively entered the liquids detergent market as the penetration of washing machines has seen an uptick.

GCPL, for instance, has differentiated itself with its proprietary formulation, leveraging the expertise of Godrej Industries, and has launched Fab liquid detergents at a competitive price point of Rs 100. Concurrently, local players are also gaining market share in this fast-evolving segment.

In response to the heightened competition, HUL has introduced an 800ml pack of Rin for Rs 99, along with low unit price packs starting at Rs 10.

"With recent launches at the Rs 99 price point, we believe consumers will see the case for using liquid even in bucket wash," said Gupta.

India is undergoing a significant transformation at a fast pace, which is reflected in the changing consumer trends, Jawa stated during his most recent investor call. "With increasing affluence, the new India is spearheaded by aspiration for better quality of life. Consumers have become increasingly discerning seeking higher order benefits and making holistic buying decisions."

Notwithstanding the short-term pangs, analysts maintain a positive outlook on HUL in the medium to long term.

"What has been ailing HUL is its inability to execute in a volatile setting—first Covid, then inflation, and now deflation," said Gupta. "The company has a fairly large business to manage, compounded by management changes. However, the new management now appears stable, and we see execution improving across segments. This should reflect in an improving volume trajectory for the company moving forward."

Nuvama's Roy concurs. "Negative pricing is likely to reverse in the second half of FY25 and we anticipate demand recovery to be gradual for HUL."

The street anticipates HUL's second quarter volume growth to be between 4-5%, in sync with the growth seen in the preceding quarter.