India's largest consumer staples player Hindustan Unilever's earnings show for the three months ended September as falling consumption caused volume growth to slip under brokerages' estimates.

The Street showed its disappointment as HUL shares cracked nearly 7 percent in trade on October 24. Hindustan Unilever recorded its steepest fall in four years, from when it cracked 6.6 percent on March 23, 2020, following the pandemic related sell-off.

At 9.50 am, HUL shares were quoting Rs 2,482 per share, down 6.7 percent on the NSE.

Hindustan Unilever's consolidated net profit for the July-September quarter declined 2.4 percent to Rs 2,591 crore from Rs 2,668 crore in the same quarter a year ago, falling more than Street expectations. The FMCG giant's revenue expanded 2.1 percent on-year to Rs 16,145 crore.

With most analysts penciling in expectations of HUL reporting a volume growth of 4-5 percent for the quarter, volumes grew 3 percent as demand from the urban areas and metro cities was tepid.

Rural demand continued to recover, outperforming urban demand over the past few quarters. International brokerage JP Morgan noted that slowing urban demand casts a shadow on the demand outlook.

However, during the earnings call, the management noted that the trend was visible across the entire consumer staples landscape, not just HUL. The firm plans on undertaking volume-led growth to drive competition, and isn't shying away from planning further price hikes.

Hindustan Unilever's premium portfolio outperformed the popular and mass segments. The upgradation trend, coupled with premiumization, was evident across rural markets as well, with the trend likely to maintain momentum in the near-future.

"Despite weakness in overall consumption, we believe Hindustan Unilever can still see an upward growth trajectory," said domestic brokerage Motilal Oswal.

However, international brokerage Investec noted that the lack of margin expansion, as well as no clear demand uptick in the industry, imply that HUL will not see volume growth beyond 4-5 percent in the near-term.

During the quarter, gross margins contracted by around 140 basis points to 51.6 percent as a result of rising inflation in the raw material segment. To circumvent pressure on the EBITDA margins, Hindustan Unilever slashed its spending on advertising and promotion by 15 percent, leading to a lower contraction in EBITDA margin by 50 bps to 23.8 percent.

However, in the upcoming quarters, HUL will continue focus on driving gross margins and step up A&P spends to drive underlying volume growth. One of the key methods will be to implement pricing action and bump up prices in low single digits, which will support the topline as well as margins.