HUL's Q4 numbers are a mixed bag

While operating margins jump 260 basis points to 16%, adjusted earnings grow 11%

Hindustan Unilever (HUL)’s March quarter numbers are a mixed big bag. Along expected lines, the company's profit margin got a boost from a sharp fall in raw material costs but overall demand for products remained muted. While the company’s sales grew nine per cent to Rs 7,555 crore, volume growth was six per cent. The firm’s earnings during the quarter was driven by a sharp expansion in margins and the sale of real estate assets. However, the asset sale resulted in a higher tax pay-out, which analysts believe, has impacted adjusted earnings growth.

So even as net profit grew 16.7 per cent to Rs 1,018 crore during the quarter, recurring earnings growth was 11 per cent. Reliance Securities says: “HUL’s recurring earnings need to be viewed in context to sale of property, for which HUL recorded an extraordinary income of Rs 179 crore, and additional tax expense of Rs 54 crore (we believe), which is suppressing the recurring earnings.”

Adjusting for this additional tax expense, recurring earnings for HUL would have grown by 11 per cent year-on-year (y-o-y). The company’s reported tax rate was 33 per cent against the estimated 29 per cent.  Despite the double-digit revenue and earnings growth, the Street believes volume growth for its products will remain in mid-single digits as rural India is likely to remain under stress. Currently, HUL derives half its sales from rural India. Even though a pick-up in urban discretionary sales is visible in this quarter, the next two quarters are likely to remain under pressure. In the March quarter, all segments - other than soaps and detergents - reported strong double-digit sales growth. Sales of soaps and detergents grew five per cent, personal products 13.4 per cent, and packaged foods expanded 13.6 per cent.

 

The big positive in the quarter has been strong margin expansion. Lower input costs shored up gross margins by 317 basis points (bps). Even though the company reinvested some gains in brand building, operating margins expanded by 260 bps to 16 per cent. Margin expansion was not only at the headline level, but across segments. Margins for soaps and detergents expanded 120 bps, y-o-y, to 13.3 per cent, while personal products reported a margin expansion of 280 bps y-o-y to 27.8 per cent.

Even though the Street expects demand to revive towards the second half of the financial year, analysts believe the stock continues to look expensive. Motilal Oswal Securities says: “HUL reported profits above our estimates on the back of one-time gains. We have a neutral rating on the stock given that low growth does not justify current valuations.”