Margin concerns

FMCG major Hindustan Unilever (HUL) just about managed to meet the Street expectations for the quarter ended June, registering growth of 11 per cent in adjusted net profit (excluding extraordinary gains) on a year-on-year basis.

What, though, disappointed the markets was the underlying volume growth of 8.3 per cent — the lowest in the past six quarters, wherein volume growth has ranged 11-14 per cent. Analysts were expecting the company to post 12 per cent growth in volumes in the quarter. The June quarter also saw margins come under pressure, which the management believes is likely to continue for a few more quarters due to volatile input prices.

The stock, which has appreciated nearly 20 per cent since March 2011 due to robust volume growth in the last few quarters, fell by almost a per cent or by Rs 3.2 to close at Rs 322.70 on Thursday. It currently trades at 29 times its FY12 estimated earnings and appears to be fairly valued. Most analysts are neutral on the stock.
 

ONE-OFF BOOST
In Rs crore	Q1FY12	FY12E
Sales	5,579	22,666
Y-o-Y chg (%)	14.4	16.8
Ebitda (%)	13.5	13.5
Y-o-Y chg (bps)	-45	-36
Adjusted PAT*	578	2,494
Y-o-Y chg (%)	11.0	16.5
* Excludes exceptional gains;  E: estimated   Source: Company, Bloomberg

VOLUME GROWTH SLOWS
The slowdown in volume growth in the June quarter was primarily due to the soaps and detergents business, which accounts for 46 per cent of the company’s sales, even as Rin (a major laundry brand) reported double-digit volume growth.

Rising cost pressures saw the company taking an average increase of six per cent in prices which helped the topline grow by a little over 14 per cent in the quarter. However, despite the judicious price hikes, Ebitda’s margins contracted by 45 basis points. The management remains cautious on input (commodity) cost pressures in the near-term.

HUL’s ad spends contracted by 16 per cent in the quarter, in line with the overall FMCG industry trend. HUL has been selective in pruning ad spends with higher focus on the personal care segment. This strategy, it believes, will enable it to compete efficiently as well as maintain its leadership position going forward. This should also help keep a check on margins. Analysts estimate margins to fall by 35-40 basis points for the current year.

However, the strategy of lowering ad spends to protect margins may come at the cost of volume growth, says an analyst with Angel Broking. On the whole, HUL’s reported net profit grew by 17.6 per cent year-on-year to Rs 627 crore aided by a three-fold rise in exceptional gains (led by profit on sale of properties in Jaipur for Rs 51 crore).

Among the key segments, while the soaps and detergents saw slower volume growth, it reported a robust top-line growth of 12.8 per cent year-on-year, largely driven by price rise.

Thanks to the these, lower ad spends and reduction in grammage, in this segment, the margin contraction was arrested at 174 basis points to 9.2 per cent. In the March quarter, margins had fallen by 525 basis points. Sequentially, the margins expanded by 174 basis points, which is positive for the company given its efforts to revive margins in this category.

While most other segments witnessed margin contraction for the quarter, the personal products business, which accounts for 29 per cent of sales and almost half of profits, stood out with a volume-driven topline growth of 19 per cent and an expansion of 53 basis points in profit margins. Analysts, however, believe personal care margins could slip from existing level of 25 per cent due to competition.