HUL steps up advertising spends

FMCG giant Hindustan Unilever Limited (HUL) has stepped up its advertising spends despite inflationary pressure and declining volumes in the FMCG segment. For the quarter ended 30th June, the company increased its ad spends by 30% to Rs 1334 crore against Rs 1029 crore in the corresponding quarter of the previous fiscal. In Q4 FY22, HUL's ad spends had declined by almost 9% to Rs 1,296 crore from Rs 1,418 crore a year ago.

Speaking to analysts during the Q1 FY23 earnings call, HUL CFO and Executive Director, Finance and IT Ritesh Tiwari said that the FMCG major is ensuring that its brands get adequate support to maintain a higher share of voice. HUL has 50+ brands across several key categories.

Tiwari said HUL has been able to hold EBITDA margins at a healthy 23.2% in Q1 due to clear focus on fundamentals. "First ensuring that we adequately support our brands and maintain our share of voice ahead of our market shares. As you can see, our A&P expenditure has increased 70 bps year-on-year as we continue to invest at competitive levels and lapped a relatively weak base. This is a 30% absolute rupees crores increase year-on-year," he stated.

HUL, he said, is investing in products and giving better value to the consumers. "Our product superiority continues to be 2X of pre-Covid levels," he added. Tiwari noted that the FMCG giant continues to take calibrated pricing actions. "Our UPG for the quarter was 12%, a step up from 10% in the March quarter of 2022," he said.

He also stated that the most important thing is to drive savings harder and optimise all non-consumer facing costs. "Through this frugal mindset and growth leverage, we have delivered a 270-bps reduction within other expenses and employee costs."

Tiwari said that the company's margins in the Foods & Refreshment category declined during the quarter due to increase in advertising spends. "Foods and Refreshment margins declined by around 200 bps largely on account of step up in A&P investments and an adverse mix coming from higher growth in ice-cream business relative to other categories like health food drinks and tea," he added.

Answering a question about the EBITDA margin settling down at 25%, the HUL CFO stated that EBITDA margins are dependent on the commodity prices and the competitive investment in the business. He also expects the competitive intensity on ad spends to go up.

"When deflation like whichever commodity comes off, we do also expect competitive intensity to go up on A&P, on investments, on innovation, so margins of course have one element of commodity hence gross margin and pricing, there is also an element of competitive investment in the business that we have to do," Tiwari noted.

Tiwari stated that HUL has two key priorities. One is to grow the consumer franchise and second is to protect its business. "We will do this by investing competitively behind our brands, driving savings harder and taking calibrated pricing actions as needed. Second, continue on our journey to create a purpose-led future-fit HUL and deliver 4G growth, growth that is consistent, competitive, profitable, and responsible."