HUL: Excitement still missing

While a pick-up in personal care and margin gains helped the company meet Street expectations in Q3, volume growth remains just 4%

One-time gain on sale of properties (Rs 23 crore versus exceptional loss of Rs 7 crore last year), coupled with a lower tax rate, enabled Hindustan Unilever Ltd (HUL) beat Street earnings estimates for the December 2013 quarter (Q3) by a good margin. Its net profit at Rs 1,062 crore was up 22 per cent year-on-year (y-o-y).

However, excluding the one-offs, net profit of Rs 955 crore was up 9.6 per cent y-o-y and was only 1.6 per cent ahead of the Bloomberg consensus expectations of Rs 940 crore. Net sales at Rs 7,038 crore, up 9.4 per cent y-o-y, were a tad lower than estimates of Rs 7,103 crore.

Volume growth at four per cent was a tad lower than five per cent in the September quarter. Analysts, who had estimated four-five per cent volume growth, said this figure had to pick up for the Street to get positive on HUL, which could take some time.

Rikesh Parikh, vice-president (institution corporate broking) at Motilal Oswal Securities, says: “We expect HUL’s sales growth to remain muted for the next few quarters at least, stymied by a sluggish economy.”

Most categories performed well in the quarter but the highlight was personal products. The segment, which contributes a third to revenues, grew 12.4 per cent driven by double-digit volume growth in most products. The re-launch of Fair and Lovely has received positive response, the company said in its release. Since it accounts for a little over half of profits, the 36 basis points rise in its earnings before interest and taxes (Ebit) margin to 28.6 per cent saw segment profits rising 13.9 per cent.

Soaps and detergents revenues (about half of HUL’s revenues) grew 7.1 per cent, driven by good traction in skin cleansing products. Notably, profitability for this segment,  improved with, too, profits up 14.5 per cent.

The two divisions, thus, drove overall profit growth in Q3, offsetting the lag in others. Beverages’ sales grew 7.2 per cent but profits fell 2.2 per cent. Some of the reduction in loss in  the ‘Others’ segment was more than offset by the packaged foods segment, whose loss jumped to Rs 13.4 crore versus a loss of Rs 2.6 crore last year.

Analysts, however, are a bit cautious on the gains in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin, which at 17.4 per cent was up 51 basis points and ahead of expectations of 16.7 per cent. The core profitability, they say, was driven by withdrawal of promotions in certain categories and cost savings in most line items, sustainability of which appears difficult.

Input costs (down 128 basis points as a per cent of sales to 38.4 per cent), staff cost (down 39 basis points to 4.9 per cent) and other expenses (down 21 basis points to 15.1 per cent) more than offset the 43 basis points rise in advertising and promotional expenses to 13.2 per cent. The tax rate, too, contracted 522 basis points to 18.9 per cent and was driven by write-back of excess tax provisions of the earlier year, of Rs 93 crore.

Nevertheless, the stock, which rose 1.7 per cent to Rs 576 on Monday, currently trades at 32.7 times its FY15 estimated earnings. Valuations are ahead of its historical average one-year forward price/earnings ratio of 28 times, suggesting limited upside.