HUL recently announced its financial results for the second quarter of fiscal 2022 and revealed healthy overall growth, including net profit of INR 22.9 billion (US$290 million), growth of 11% in year-on-year; as well as a 23.2% EBITDA margin – but much of the discussion focused on the inflationary challenges the company is currently facing.
According to HUL CEO and Managing Director Sanjiv Mehta, various key commodities that HUL uses to manufacture its products and packaging, including barley, palm oil and polyethylene, are all experiencing record inflation.
“Compared to 10-year median prices [crucial commodities such as barley and polyethylene have all inflated by more than 50% and the prices are at an historic high,” Mehta said during an investor and press event announcing HUL’s financial results.
“Palm oil [has] saw more than 100% inflation [and] has softened in recent days since its peak [but is still not at normal levels]and even tea which experienced extremely high inflation in 2021 and has [since] cooled from this peak is still at relatively high levels [of inflation].
“Another source of inflation [in India] has been the depreciation of the currency, with the dollar strengthening and USD-INR rates which were previously relatively stable around 74-75 now hovering around 80.”
HUL’s Chief Financial Officer and Executive Director of Finance and IT, Ritesh Tiwari, further pointed out that this inflation has had an impact on production costs, hinting at possible new pricing measures to ease this pressure. .
“Inflation has certainly worsened further in this quarter [and we are seeing] a 330 basis point year-over-year increase in our cost of goods sold,”said Tiwari.
“We managed to maintain EBITDA margins at a good level of 23.2% [but] inflation continues to be a significant challenge [and as many have seen]market prices for most commodities are at very high levels.
“Needless to say, we will continue to drive productivity improvement broadly across our business and [at the same time] take calibrated pricing measures. [In fact]looking to the short term future, [we expect] growth will be driven by prices as inflation continues to impact consumption.
As part of its strategy to combat the effects of inflation, as part of its Foods and Rereshment business, HUL plans to put a heavy emphasis on areas such as tea – mainly due to its strong rebound after record prices linked to inflation – and also health foods such as Horlicks malt drink.
“HUL’s tea business is a market leader [here in India] and more from year to year [cost] deflation we are seeing, so far the harvest has also been good [despite] the recent floods in Assam, I hope the global production will stop”,Tiwari added.
“We are both value and volume leaders in the tea category and already have a fabulous portfolio across tea prices, whether it’s Taaza at the mass end or the premium Taj Mahal at the other. end – and it’s a pretty solid wallet.
“We also did what was necessary in terms of pricing – we were very measured and increased the prices in small steps when the tea swelled hugely and [have] does an equal job of also ensuring that the price value equation remains intact and competitive for our consumers.
“So [all in all] we will do what is necessary in our tea strategy to ensure that we maintain the gains we have made, remaining strong at all price points and demonstrating agility [into pricing and innovation].”
Mehta added that tea is also a crucial category for HUL, as it is part of the company’s unique “Winning in Many Indias” (WIMI) model, which classifies India as a whole into 15 consumer groups to provide information on the development and marketing of products, further supported by 16 business teams operating in micro-organisms to reduce the landing time of innovations.
“Categories like tea lend themselves much more to our WIMI game, because your competitors are different in different pockets, the shape of the market is very different in different pockets, and you can’t have one recipe for the whole country. [when it comes to innovation]”,he said.
“I think that among large companies, we are the most adept company to play the WIMI game [and that will help us to grow even faster].”
Healthy foods and drinks
Besides tea, HUL also sees its Health Food Drinks business as an important sector to help it rebound from the impacts of inflation, particularly around the Horlicks brand.
“We have streamlined the Horlicks portfolio and are also going much more heavily into the range more with this”,said Mehta.
“It’s a superior science line, and we have a very attractive innovation funnel [plus] we are also focused on strengthening our core portfolio turnover and a lot of market development work is underway – when commodity prices dip we will see a huge rebound [for Health Food Drinks]then we will start releasing the innovation that we all prepared in the pipeline.
“We have several projects [and] ultimately this whole category [revolves around] pure nutrition, vitamins, mineral supplements [and] is a focus area for us globally and certainly very relevant for India given the nutritional deficiency in the country.
That said, it was pointed out that at present, inflation still has a significant impact on Horlicks given ingredients such as milk and packaging materials, which must be considered before considering an expansion.
“If one packet of Horlicks INR2 ($0.025) is to yield a cup of Horlicks, there is no way to reduce the amount in that cup of Horlicks beyond a point that will not yield a full cup of Horlicks – So there are these limitations and within that we did the best we could on the price packs,”said Tiwari.
“Hopefully when the goods [pressure] breaks loose, the unit economics of this portfolio in many parts will be restored, and if necessary, if necessary, we will restore value to the consumer – [but] at all times, we will be competitive with our offers at the right price for our consumers. »