Hindustan Unilever's Q3 show may be weaker than expected

ET Intelligence Group: FMCG bellwether Hindustan Unilever is expected to post on Thursday subdued performance for the fiscal third quarter, marked by input cost inflation, high base effect, delayed onset of winter and lacklustre demand amid fears of the third Covid-19 wave.

Revenue for the quarter is expected to increase by around 8% - the slowest in six quarters. The growth is likely to be driven by price increases rather than a healthy surge in volumes.

The December-quarter performance of consumer goods companies has been hurt by several factors. The delayed onset of winter has a direct implication on the demand for skincare products.

The rural demand growth also slowed down, while to make matters worse, fears over the third Covid wave due to the Omicron variant also adversely impacted the demand prospects.

Higher cost of raw materials such as palm oil and crude oil derivatives, aggravated by an increase in logistics cost, is going to put pressure on the company's margins.

While the price increases taken by the company are expected to compensate for the hit on profitability, they end up hurting consumer demand and the volumes sold. is expected to maintain operating margins at around 25% due to several measures such as price increases, cost-cutting and lower ad spend.

Management commentary on the intensity of input cost inflation, impact of Omicron on overall consumption, outlook on rural and urban demand, terms of negotiation with partners of the traditional distribution channel and strategy on product pricing would be important to watch out for.

The HUL stock has corrected 14% during the December quarter. It closed 2.46% lower at ₹2,310.85 on the BSE Wednesday, with a price-to-earnings multiple of 67.

A weaker-than-expected earnings performance and a diffident demand outlook can depress the valuations in the near term.

Besides the quarterly performance, an announcement expected from parent Unilever later this month on a revamp of its structure with any possible implications for HUL's segments or brands may emerge to be a fresh trigger for the HUL stock.