Inflation alert spooks investors despite Unilever India hitting profit targets

Hindustan Unilever, the Indian arm of the global consumer goods titan, posted quarterly profit in line with market estimates, boosted by a broad economic recovery that was overshadowed by warnings of inflationary challenges ahead. 

Net income for the Mumbai-based unit of Unilever rose 9% to 21.9-billion rupees in the September quarter, according to an exchange filing on Tuesday. That nearly matched the average 22-billion rupees forecast by analysts in a survey by Bloomberg. Revenue advanced 11% from the year-ago period to 125.2-billion rupees while costs jumped 12%.

Benefits from a rebounding economy as lockdown-weary Indians finally started stepping out were offset by the unprecedented rise in raw material prices for the maker of Dove soap and Lipton tea. The company management indicated that these inflationary were likely to persist, spooking investors.

The “quarter witnessed a sequential improvement in trading conditions, albeit remained challenging with unprecedented levels of input cost inflation and subdued consumer sentiments”, chair and MD Sanjiv Mehta said in a statement. “We haven’t seen this kind of inflation for many years,” he told reporters.

Hindustan Unilever’s shares slipped 4% at the close of Mumbai trading — the most since early May — paring this year’s climb to 6.3% and underperforming the rise of the benchmark S&P BSE Sensex gauge, which has climbed almost 30% in 2021.

High inflation is “bound to continue” as energy and commodity costs escalate, its CFO Ritesh Tiwari said on the call. “It will remain firm, ” he said, adding that the freight rates have “increased multifold”.

In July, the parent group warned that costs for raw materials that go into shampoo, detergents and ice cream were increasing at the fastest pace in more than a decade, forcing Unilever to scale back profitability goals.

Rebounding economy

“Calibrated price increases and laser sharp focus on savings has helped us protect our business model,” Mehta said in the statement.

While high input prices have been eating into its margins, Hindustan Unilever has benefited from a rebounding local economy and ease on movement restrictions as daily Covid-19 infections slipped to less than one-tenth of the fresh cases reported in early-May. The company reported “high double-digit growth” in skin care and cosmetics as mobility improved.

The coming festive season may also bring some cheer. Retailers in India expect rising demand in coming weeks that may boost the consumer goods sector. Companies are adding staff in warehouses as well as in their delivery hubs as Indians next month celebrate their first Diwali — the Hindu festival of lights — since the country’s two huge Covid-19 outbreaks confined millions to their homes. 

The Reserve Bank of India expects the months-long festival season to bolster urban demand in the second half of the financial year to March 2022, while rural demand is likely to be buoyed by a robust monsoon and record food grain production. 

India’s finance minister told Bloomberg on Sunday that the country is in no hurry to unwind the Covid-19-era stimulus.

But that is not immediately reassuring for Hindustan Unilever’s investors. Besides the profit booking in the market, “there is a concern on margins and rising input costs”, Kranthi Bathini, a strategist at Mumbai-based consultancy WealthMills Securities, said on the latest quarterly earnings.

Bloomberg News. More stories like this are available on bloomberg.com