At HUL, cost savings take centre stage

HUL is keeping a close watch on profitability as pressure to improve sales volume growth increases

For two successive quarters, the country’s largest consumer goods company, Hindustan Unilever Ltd (HUL), reported strong operating profit margin. While the March quarter saw operating margin improve by 100 basis points year-on-year, this metric jumped 170-180 basis points year-on-year in the June quarter.

Analysts say HUL is keeping a close watch on profitability even as pressure to improve sales volume growth increases. Operating margin, a measure of profitability derived by dividing operating profit by revenue, is on HUL’s radar as part of parent Unilever’s global strategy.

In April, the world’s second-largest consumer goods company, Unilever, said it would combine two of its main business units, food and refreshment, divest its spreads business, buy back shares worth $5 billion, raise dividends and target a 20 per cent operating margin by 2020, up from 16.4 per cent last year.

The move was triggered in part by US major Kraft-Heinz’s aborted bid to take over Unilever in February, which many described as a wake-up call for the Anglo-Dutch major. Unilever chief financial officer Graeme Pitkethly had admitted the measures announced were part of a “significant change in 10 years”.

While the steps were aimed mainly at boosting its prospects in Europe and North America, regions where it has been struggling to grow for a while, the India business, which contributes eight-nine per cent to Unilever’s $56.1-billion overall revenue, is also working on the lines proposed by its parent.

During its investor call on Tuesday following announcement of June quarter results, HUL chief financial officer P B Balaji said the company’s costs-savings programme would continue in the coming quarters as it intended to keep its eye on operating margin.

“Measures such as zero-based budgeting have helped check costs (especially advertising expenditure) and improve savings,” he said.

Zero-based budgeting is an initiative where the firm scrutinises all costs items and looks at what can be eliminated and what can be retained. 

In HUL’s case, there was a move to cut promotional spends and bring efficiencies in media buying and planning during the June quarter, analysts said. This helped reduce the company’s year-on-year advertising and sales promotion expenditure by 20 basis points as a percentage of sales for the June quarter. Additionally, the company also cut employee costs and other expenditure during the period, bringing the two down by 30 and 40 basis points year-on-year, respectively, as a percentage of sales, for the June quarter.