HUL exceeds estimate, sees challenges ahead

If Hindustan Unilever Ltd (HUL)’s performance in the June quarter is an indication, there is good news for investors in fast-moving consumer goods companies. The company reported better-than-expected performance in the quarter on an overall basis even after adjusting the de-merged exports business.

Sales growth of 20 per cent year on year (y-o-y), much higher compared to 15 per cent expected by analysts, was driven more by pricing, though volume growth of nine per cent was also in line with estimates. HUL witnessed continued demand growth in rural and urban markets.

HUL saw an improvement of 160 basis points in operating profit margin to 14.5 per cent as the company implemented cost efficiencies in several overheads, namely raw material costs, which is down 505 bps to 52.8 per cent to total income. Besides, lower base of the corresponding quarter last year (12.7 per cent) also helped.

Consequently, core net profit (before accounting for exceptional items) has increased by a robust 48 per cent to Rs 855 crore despite taxes more than doubling.

Net profit after accounting for an exceptional item of Rs 607 crore (primarily sale of Worli and Bangalore properties) has more than doubled to Rs 1,331 crore. “We are pleased with our performance considering the challenging environment. Our growth has been profitable, competitive and broad based,” said R Sridhar, chief financial officer.

He, however, maintained that such high sales growth could face resistance, especially if monsoon fails in the rest of the season. Rural markets formed 45 per cent of the company’s overall revenue. Continued high inflation and rupee depreciation would put companies, including HUL, in a dilemma as whether to go for further price rise.

“The environment continues to be challenging in terms of inflation and a general economic slowdown,” said Harish Manwani, chairman of HUL.

Added Sridhar: “Next two quarters are challenging in terms of final shape of monsoon, significant rupee depreciation and inflation.”

The rupee depreciation and inflationary pressure continue to be major concerns. There will be an additional expenditure of higher advertising expenditure. “Competitive intensity is going up in the sector. Our strategy on adspends is dependent on competitive landscape and the innovation pipeline,” Sridhar added.