HUL profit declines 2% on high input costs

Stock slumps 5.4% to close at Rs 281.6.

Inflationary pressures appear to have had an adverse impact on consumer goods major Hindustan Unilever (HUL). The company on Tuesday reported a net profit decline of 1.8 per cent to Rs 637.5 crore for the quarter ended December. In the corresponding period a year ago, net profit stood at Rs 649.1crore.

“If exceptional items, such as profit on sale of properties and sale of investments, are excluded the net profit decline is 2.1 per cent,” Sridhar Ramamurthy, chief financial officer, said at a press conference here on Tuesday.

Net sales increased 12 per cent to Rs 5,027 crore as against Rs 4,504 crore reported last year, largely on the back of strong volume growth, which was 13 per cent, Ramamurthy said. HUL’s foods business grew 11.3 per cent, with tea, coffee, noodles and ice-cream segments contributing strongly.

This is HUL’s fourth consecutive quarter of volume growth. In the last three quarters, volume growth was as follows — 14 per cent in the September quarter, and 11 per cent respectively in the June and March quarters. As analysts point out, this volume growth was due to the company's cautious approach to price rise. After remaining silent on the front for most of 2009-10 and the first quarter of 2010-11, HUL increased prices by about 7-10 per cent in soaps in the second quarter, also increasing the price of Rin by 8 per cent during the same period.

During the third quarter, price of detergents were increased again by 7-8 per cent, while the price of soaps such as Lux was increased by 5 per cent. Creams such as Fair & Lovely also saw a jump of about 5 per cent, analysts said.

Despite this, the company’s price-led growth for the third quarter was a negative 1 per cent, indicating that price rise were not enough. Input cost pressures were clearly more.

In the quarter under review, palm oil, for instance, used to make soaps, jumped 32 per cent, while linear alkylbenzene (LAB), also used to make soaps and detergents, increased by 10 per cent. Crude also jumped by 22 per cent, Amnish Aggarwal, senior vice-president, Motilal Oswal Securities said.

Input cost pressures hit gross margins, which contracted by 220 basis points (bps) during the quarter. Operating profit margins were down 320 bps, Ramamurthy said.

“Looking at the input cost scenario, we will raise price since cost savings alone is not enough to deal with input cost inflation,” Ramamurthy said.

Competitive action in all key categories, including home and personal care, processed foods and beverages meant advertising and sales promotion (ASP) expenditure was at 14.8 per cent of net sales, which is an increase of 70 bps over the corresponding period a year ago, he said. But the weak results failed to ignite the stock price of HUL, which slumped 5.4 per cent on the Bombay Stock Exchange (BSE) to close at Rs 281.6.