HUL's 3% volume growth disappoints Street

Management says performance better than industry, net profit up 18% on one-time gains

Hindustan Unilever (HUL)'s stellar run on the stock markets in the run-up to its third-quarter results proved to be a case of over-enthusiasm after the company declared its earnings on Monday.

The stock tanked over five per cent to Rs 892.80 over the previous closing as net sales grew eight per cent for the quarter to Rs 7,579 crore with an underlying volume growth of only three per cent — lower than the four-five per cent range that the company had been reporting for the past three quarters. Volume growth was also way below street estimates of five-seven per cent.

The HUL management blamed the delayed onset of winter as well as a lull in urban areas and a sustained slowdown in modern trade and discretionary categories for the poor pick-up in volumes. Price cuts to the tune of 5-10 per cent in categories such as soaps and detergents did not spur growth, the management said. “Volume growth for the industry was merely one per cent and value growth five per cent. Against this backdrop, we were ahead of the market,” HUL Managing Director and Chief Executive Sanjiv Mehta said.

Net profit saw higher growth at 18 per cent for the quarter to Rs 1,252 crore not on operational performance but one-time gains. This is borne out by the flat growth seen in profit before exceptional items as HUL grappled with higher tax rates and discontinuation of fiscal benefits during the quarter.

Barring packaged foods that grew 13 per cent, soaps & detergents and personal products grew seven per cent each, while beverages grew nine per cent, implying that the slowdown pangs were broad-based.

Mehta, however, said this was the last quarter for weak sales performance as the nearly Rs 3-lakh-crore consumer goods market showed signs of the slowdown bottoming out. “Segments such as homecare, beverages, rural and general trade saw a pick-up in volumes. This gives us reason to believe that the environment will improve going forward,” Mehta said.

Ebitda (earnings before interest, taxes, depreciation and amortisation) or operating margins were up 10 basis points (a basis point is a hundredth of a percentage point) only, even though analysts had indicated that margin expansion would be more on the back of the commodity correction seen during the quarter.

Mehta said the gains on margins on account of lower commodity costs would be visible with a lag. Meanwhile, competitive pressures compelled HUL to keep ad spending high, growing by Rs 48 crore to touch 12.9 per cent of net sales during the quarter.

"HUL’s results disappointed as volume growth missed our estimates of five per cent. Gross margins expanded in line with expectations. But excluding one-time provisions in employee expenses, the reported Ebitda came in five per cent below our estimates. We would expect that sales growth of the company would pick up in the coming quarters, as lower inflation and improved sentiment help lift volume growth. Benefits of lower commodity prices are visible in the quarter and will continue to be a useful tailwind for the company," Ritwik Rai, consumer goods analyst at Kotak Securities said.