Hindustan Unilever Ltd’s (HUL’s) December quarter earnings show the extent to which demonetization has hit consumption growth in the economy.

India’s largest consumer packaged goods maker said on Monday that sales volumes declined 4% from a year ago in the three months ended December. Net profit was higher because of one-time gains.

HUL management told television channels that while things are looking better, it expects “the recovery will be gradual".

The volume decline accelerated from the 1% fall in the September quarter as customers cut back spending even on essentials following the cash crunch triggered by the scrapping of high-value banknotes on 8 November.

“During the quarter, the squeeze in liquidity resulted in reduced trade pipelines and lower consumer offtake. The impact was varied across segments, channels and geographies," said P.B. Balaji, chief financial officer, HUL.

As such, the impact has been much more in geographies such as central India as compared with the south and west. Rural markets were hurt more than urban ones as expectations of a recovery led by normal monsoon rainfall after two years of drought were dashed by the note ban.

The company said it responded to these adverse market conditions with speed by rejigging its supply chain and extending credit to its distribution partners. Management said the cash-led wholesale part of the trade channel was still facing stress.

Some analysts such as Sanjiv Bhasin of India Infoline Ltd are optimistic. Bhasin expects the sector to stage a rebound as more cash comes back into circulation.

“We have to take this (the results) with a pinch of salt as there is the demonetization impact and also higher raw material prices that the company and sector is grappling with," said Bhasin.

HUL’s revenue fell 1.24% from a year ago to Rs8,226.5 crore in the December quarter. The fall in revenue was lower than the volume decline as the company hiked prices of some personal care and home care products, mainly due to commodity price increases; palm oil and crude oil prices have risen sharply.

Personal care segment sales, which contribute almost half of its revenue, fell 2.7% to Rs3,980.17 crore.

“Realization improved because of change in mix and some price hikes. The price hike taken could be around 4%. In fact, price hike would have been much more if this quarter would not have been affected by demonetization," said Sanjay Manyal, senior research analyst, ICICI Securities Ltd.

HUL management said consumers were buying smaller quantities but at more frequent intervals. It added that the so-called premiumization (or consumers buying premium products in the same category) wasn’t affected in the December quarter.

As sales fell and costs went up owing to higher input prices—especially vegetable oil and crude oil prices—HUL’s operating profit fell 5%. Analysts expect prices to continue increasing on the back of higher commodity costs in the quarters ahead.

On the flip side, “because commodity prices are rising, it may work as a lever to provide growth in terms of price hikes", said Manyal.

Despite the fall in operating profit, HUL’s net profit rose 6.83% to Rs1,037.9 crore in the quarter, thanks to one-time income from the sale of properties.

Shares of HUL gained 0.25% to close at Rs863.25 on the BSE while the benchmark Sensex rose 0.31% to close at 27,117.34 points.

Isha Trivedi contributed to this story.

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