HUL gains lost ground, but concerns remain

Net profit grows 13.2% in September quarter; net sales up 10%

The country’s largest fast-moving consumer goods company, Hindustan Unilever (HUL), delivered a decent set of numbers for the quarter ended September 30. The Street had kept its fingers crossed in the wake of parent Unilever’s result, announced two days ago.

Unilever had reported the slowest quarterly sales growth in four years as demand for soaps and spreads declined globally. Slowing growth in emerging markets (5.9 per cent in the September quarter, versus 12 per cent last year) had impacted its performance, Unilever said.

But HUL managed to pull up its performance in the second quarter, delivering 9.6 per cent growth in net sales to Rs 6,747.2 crore, while net profit was up 13.2 per cent to Rs 913.8 crore. But for an exceptional gain of Rs 33.4 crore (Rs 1.6 crore last year), profit growth would have been lower, at 9.2 per cent. However, this was better than the Street expectations. Analysts of six leading brokerages had estimated the company to report revenues of Rs 6,820 crore and net profits of Rs 671 crore.

Underlying volume growth stood at five per cent for the September quarter, lower than the year-ago period, when it had stood at seven per cent, but marginally higher than the June quarter (when it was four per cent).

This was largely on account of a record 38 per cent increase in profitability and 16 per cent revenue growth reported by the beverages division.

 

The beverage division — packaged tea and coffee — accounted for 40 per cent of HUL’s incremental PBIT (profit before interest and taxes) during the quarter. The division’s contribution to revenue was much lower at 12.2 per cent in last quarter. Profit also got a boost from a sharp turnaround in its packaged food business, where profits jumped 14 times to Rs 13.3 crore.

“In beverages, we have seen consistent growth in the past few quarters. This has been across the board, both at the upper, mid and lower ends of the market both in tea and coffee,” Chief Financial Officer R Sridhar said.

Operating margins, as a result, expanded 30 basis points during the quarter.

A gross margin expansion of 150 bps and saving in other expenses of 60 bps were offset by higher advertising and sales promotion investments (170 bps), resulting in marginal Ebitda expansion of 30 bps,” said Nitin Mathur, consumer & retail analyst, Espirito Santo Securities.

Sridhar said: “Since December 2012, we have held on to the five-per-cent mark in terms of volume growth. The June quarter was an exception because of the significant upstocking (stock that was built up) due to the LBT (local body tax) strike in states like Maharashtra in the March quarter. This impacted volume growth in the June quarter.”

However, the company’s two biggest revenue drivers — soaps & detergents and personal care — continued to face slowdown. Revenues from the soaps & detergents segment, which accounts for half of the total, was up just 6.4 per cent — lower than the 7.7 per cent growth seen in the June quarter. The segment profit before interest and taxes (PBIT) went up just 4.5 per cent.

Personal products, the performance of which was dismal in the June quarter, recovered in the second quarter to register growth of 11.8 per cent. Sridhar attributed this to the all-round performance of the category. “All segments from skin care, oral care, hair care and colour cosmetics delivered good growth. We relaunched Fair & Lovely during the quarter which was significant,” he said. The division had accounted for 28.4 per cent of HUL’s revenue and 41.3 per cent of its PBIT in the previous quarter.

The division, however, is facing heightened competitive intensity and profit growth was muted, at just 5.3 per cent. This was largely due to 24 per cent increase in brand and promotion spend.

Analyst say HUL may not be able to sustain this performance, given the continued macro-economic headwinds. “Consumer companies gained from the spillover effects of the government releasing subsidy payments due in the last quarter of 2012-13 in the first quarter of the current financial year, besides rise in election-related expenses. But once tightening starts, demand will again begin to taper,” says Dhananjay Sinha, co-head, institutional equity, Emkay Global Financial Services.