Data shows why HUL Chairman is urging the government to spend more to boost consumption
- HUL Chairman and Managing Director, Sanjiv Mehta made a clarion call for more government support to boost consumption in the cities.
- Nearly 60% of the total sales for HUL comes from urban cities, which fetches a large portion of the premium for FMCG companies.
- Between falling earnings, job losses, poor business, and widespread risk aversion, many retail stores have closed down, and HUL’s distributors are not able to recover their dues.
AdvertisementSanjiv Mehta, the Chairman and Managing Director (CMD) of Hindustan Unilever (HUL), said that India would have to be “aggressive” with spending to boost consumption in the cities before it’s too late. For some of the distributors of India’s largest consumer staples company, the damage has already been done.
Speaking at a virtual event organized by the All India Management Association (AIMA), Mehta raised the need for a cut in interest rates, given the signs of urban distress that have emerged due to the COVID-19 pandemic. “There is a risk of inflation, but the bigger risk is the economy going into a tailspin. So there should be an aggressiveness with which we reduce the interest rates, clearly with the risk that there could be more inflation coming,” he said.
While the resilience of the rural economy has been a calming factor during the lockdown, it is not enough for the fast-moving consumer goods (FMCG) companies like HUL, ITC, or Marico to make money as urban areas account for the majority of sales in India. A big part of rural India still buys unbranded products, while the margin for FMCG companies comes from premium products, which are sold in the big cities.
Advertisement“The rural per capita consumption of FMCG is less than half of the national average. It is very visible now that the rural growth rates are higher. The issue for us is the urban growth rate,” said Mehta.
And, on that count, HUL and Britannia are the most vulnerable because the two companies make 60% of their revenue from the cities.
Source: Edelweiss report dated September 16
|Company||Rural sales||Urban sales|
Urban poor under distress
The lockdown has taken a toll on the income across regions and classes, socio-economic categories.
The government has introduced various relief measures for the rural economy during the pandemic, such as the government economic stimulus increased allocation under the MGNREGA scheme to enhance job opportunities in rural areas. These relief measures are largely focussed on rural areas.
On the other hand, Mehta believes that the government should look at how the urban buying sentiment can be revived. “There is very clear anecdotal evidence of growth rates in the staples in urban India slowing down, which could be a very clear pointer that the urban poor are feeling the stress,” he said.
The on-ground reality for HUL distributors
According to the ICICI Securities report, the increase in the distributor’s bad debts due to the lockdown has led to the permanent closure of a few retail stores. The distributors are finding it difficult to absorb this loss with margins of 4%, the report said. The company has also not offered a grace period to the credit days, which continue to hang like a sword on distributors’ necks.
With a downtrend in its revenue, HUL has reduced the number of trade schemes and discounts. The company has also taken a price hike of 8% in Red Label Dust tea. HUL’s revenues declined 7% in the first quarter if the revenue from its GSK Consumer integration— of which the food powder Horlicks was the biggest contributor—is excluded.
HUL’s share price reflects investors’ pessimism
The share price of HUL hit a nearly three-month low of ₹2,011.70 on September 20. While it recouped the losses by the end of trade, during the day - it was trading 2% lower today when the overall market was down 0.32%.
Edelweiss Securities report highlighted various factors that have led to underperformance of the HUL’s stock. One of the key reasons was that out-of-home products like Kwality Walls ice-cream and Kissan Jam constituted approximately 5% of HUL’s portfolio, and it declined 69% in the first quarter.
Edelweiss also expects margins to remain under pressure, with the declining economy. “Skincare, which is a high margin business, is doing well but still not back to pre-COVID levels. This along with tea prices being up 60% YoY and palm oil prices staying elevated, gross margin will be under pressure YoY”
And lifestyle products sell more in urban India than in the smaller towns and villages.
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