Narrow-moat Hindustan Unilever reported revenue growth of 5%, volume growth of 7% and price decline of 2%, as the company passed on the benefits of lower commodity costs in the form of lower prices, as well as adjusted pricing for its primary segment of soaps and detergents (48% of sales) for certain excise-duty adjustments. While the growth is much below our full-year forecast of 13%, we remain hopeful that the second half of the year will see some pick-up in better product mix coming from the premium categories and products as consumption picks up. With inflation coming under check and wages continuing to rise, we believe the additional disposable income generated by these two factors will be used in consumption of packaged goods, retail products by the Indian consumer. Our outlook on the Indian subsidiary of Unilever remains positive from a fundamental margin and growth perspective; however, we caution investors that the stock is currently overvalued.
Despite passing on the benefit of low raw material prices, gross margins were up 350 basis points. Much of these were utilized by the firm to beef up its advertising and sales expense by 200 basis points, allowing the additional 150 basis points to flow through to EBIT margins, which ended the quarter at 17.7%. We think these margins are unsustainable, given the high competitive intensity of the consumer market in a low inflation environment when inventory becomes reasonably priced for most local players to be back in business. Low commodity and food prices are great for the consumer but are not so good for the farmers and rural populace whose wages depend on crop pricing. As a result, a broader pick-up in revenue growth will happen when rural consumption (40% to 45% of sales) picks up. Our margin outlook for 2016 remains at 15.9% as we anticipate Hindustan Unilever will continue reducing prices to protect its volume franchise in competitive, inflation-driven soaps and detergent segment.
